
Class ' , 

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The Cycles of 
Speculation 



BY 

Thomas Gibson 
SECOND EDITION 



Published by 

Moody's Magazine 

35 Nassau Street, New York 

1909 



X 



*°.i 



x 



^&\* 



Copyright 1907, by 
THE MOODY CORPORATION 
All rights reserved 

Copyright 1909, by 
THOMAS GIBSON 
All rights reserved 



LIBRARY of CONGRESS 
Two CoDies Received 

JUN 13 1809 

ft Copjrnent tntnf .- 
XLASS A Wte. No. 

J 6 * ' COPY B. 



CONTENTS 

Part I 
Chapter Page 

I. Introduction . . .• 5 

II. The Cycles of Speculation 21 

III. The Geld Supply 37 

IV. Money 59 

V. Political Influences, Crops, Etc 77 

Part II 

VI. Puts and Calls 89 

VII. The Question of Dividends 101 

Basing Railroad Values 104 

Effects of Business Depression 105 

Undigested Securities 108 

How to Compute the Value of Rights 109 

Barometer of Averages 110 

Best Method of Trading Ill 

Indication of Crises 112 

The Ordinary Swing of Prices 113 

The Factor of Safety 114 

Borrowing and Lending Stock 117 

Scalping 120 

Crop Damage 123 

Selection of Securities 124 

The Bank Statement 125 

The Cycles of Stock Speculation 133 

The Cycles of Grain Speculation 145 

The Cycles of Cotton Speculation 155 

Conclusion 163 



The successful speculator requires four things : 

1 — A knowledge of values. 

2 — A knowledge of general conditions. 

3 — A knowledge of the machinery of specu- 
lation — and 

4— Something besides. 



Introduction 

The first step in the education of the specu- 
lator should be to clear away the illusions 
which have grown rank through ignorance, and 
flourished through prejudice. We have heard, 
and continue to hear, a great deal of ethical 
talk on this subject, most of which emanates 
from people who are not authorities, and who 
have little real conception of the subject. It 
would be pretty safe to assume that a majority 
of these same instructors speculate themselves. 
They place an arbitrary construction on the \ 
word however, and draw a dividing line be- 
tween stock or cereal operations, and other 
forms of speculation, although the basic prin- 
ciple is the same in all cases, i.e. : to buy what 
is cheap and re-sell at a profit. One of the 
most ridiculous forms which this pedantry as- i 
sumes is the warning and preaching against 
speculation by very rich men who made their 
own money speculating and could not possibly j 
have acquired it in any other way. Such ex- 

I i 

5 



6 THE CYCLES OF SPECULATION 

pressions of opinion are born largely of an ex- 
aggerated ego. 

The trouble with these critics and advisers 
is that they seldom approach the subject in the 
right way. With a full knowledge of the fact 
that speculation is an inherent part of human 
nature, and that a majority of human beings 
are bound to indulge in it in spite of every- 
thing, these sophists simply rail against the 
practice indiscriminately instead of attempting 
to point out what is foolish and fallacious. If 
we attack the practice in a general way little 
will be accomplished. If we say, "do not 
speculate," our audience will perchance give 
us a respectful hearing, — and go on specu- 
lating. If, however, we point out what is dan- 
gerous and unreasonable, confine ourselves to 
attacking the evils and explaining the de- 
lusions, some good may be done in an educa- 
tional way. We may, if we show by simple 
logic that the education and qualifications 
necessary to success are too difficult to acquire, 
actually deter many people from speculating 
in certain lines at all, a thing which could not 
possibly be accomplished by mere blanket 
warnings against the practice. One of the 
most serious blunders in the world is the com- 
mon one of under-estimating other people's in- 
telligence. People are ready and willing to 



INTRODUCTION 7 

learn, and that they do learn is shown by the 
decreasing crop of lambs. It is not nearly so 
easy for the dishonest promoters and manipu- 
lators to market poor securities at high prices 
today as it was a few years ago. And in this 
regard it may be pointed out that the press has 
actually, although in many instances uncon- 
sciously, accomplished a great deal on exactly 
the lines suggested above. Magazines and 
newspapers have, in recent years, taken on an 
educational character. Periodicals once de- 
voted to fiction or history now deal largely 
with business and social economics, and with 
the exposure of bad methods in high places, 
the ruthless uncovering of false or misleading 
statistics, and the simplification of questions 
hitherto involved; the public has been gaining 
rapidly in education and understanding. The 
fact that much space in leading periodicals is 
devoted to these subjects, is in itself prima 
facie evidence that the people can and will 
learn, for with all due credit to the editors and 
publishers, it is certain that the contents of 
magazines and newspapers are selected in ac- 
cordance with what the public demands and 
likes. 

No one will attempt to deny that a majority 
of public speculators lose. In a former volume, 
the present writer undertook to establish by 



8 THE CYCLES OF SPECULATION 

analysis of a large number of public accounts, 
the fact that 80% of the participators lost 
money. A number of critics commented on 
this statement as a body blow to speculation, 
asserting that the writer had shown that there 
was "80% against the player." These writers 
proceeded to compare this percentage with 
that existing in games of pure chance, such as 
roulette, faro, etc., and wound up by pointing 
out the tremendous drawback to the speculator 
through percentage against the player. It 
seems incredible that any sane man should fall 
into such laughable confusion of ideas. The 
percentage of players who lose in any game 
has nothing to do with the percentage against 
the player. If these critics established any- 
thing at all, it was that speculation was not 
gambling; for it requires only a moment's re- 
flection to see that in any mechanical gambling 
game where there is any percentage, no matter 
how small, in favor of the game, the per- 
centage of players who eventually lose must 
be 100. This being the case, the gentlemen 
mentioned were at considerable pains to prove 
that, as 100 per cent, of the players did not 
lose, speculation was not a gambling game in 
the strict sense of the word. That is to say, it 
could not be correctly compared with any 
mechanical device where the element of skill 
was absent. 



INTRODUCTION 9 

If we consider the matter in a gambling 
light, the percentage against the speculator 
can be determined by the proportions of com- 
missions, interest, taxes, etc., to capital in- 
vested. Taking commission alone as our basis, 
we will find that he who purchases a stock at 
$100 a share and pays one-quarter of one per 
cent, commission, has a percentage against him 
of one-quarter of one per cent. If the specu- 
lator trades on limited margins the drawback 
increases accordingly. If we assume that 100 
shares of stock are purchased in a bucket-shop 
on a one point margin, without intention or 
ability to "re-margin" the transaction, the me- 
chanical percentage is large (25%) ; if 10 points 
margin is deposited, the mechanical percent- 
age is reduced to 2J^%, etc. In the first in- 
stance, $25 or 25% of the $100 involved was 
lost when the transaction was recorded, with- 
out any change in market price. In the second 
instance, $25 was again lost or 2y 2 % of the 
$1,000 involved. 

There is no doubt that fluctuations in prices 
of securities, cereals and staples are frequently 
used as a basis for mere gambling transactions. 
But the most remarkable feature of the whole 
problem is the fact that the percentage of loss 
in transactions is greater than the mechanical 
percentage. In the work already mentioned, 



10 THE CYCLES OF SPECULATION 

the writer undertook to establish this. In 500 
accounts examined, there was a loss of $1,- 
245,000, and profits of $283,000, leaving a deficit 
of $957,000. The commission charges and in- 
terest amounted to only $275,000. There thus 
appeared a loss of $682,000 which could not be 
attributed to a gambling percentage. It may 
be added that the period considered in the com- 
putations was from July, 1901, to March, 1903, 
and that the price of the stock considered (U. S. 
Steel Common) was the same at the beginning 
and the end of the period. 

This tends to again refute the theory of mere 
gambling, with a ruinous percentage against 
the player, for no mechanical device could by 
any possibility operate against the player to a 
greater extent than the fixed percentage in 
favor of the machine. A gambling machine 
will stick to its knitting. If, for example, we 
take the simplest form of gambling device- 
two dice thrown from a cup, — we know thai 
certain numbers formed by adding the total 
spots which appear uppermost will show 
more frequently than others. Thus the number 
two can be effected in but one way, the number 
three in two ways, the number four in three 
ways, and so on up to the number seven, which 
can be formed by six different combinations, 
thus: 



INTRODUCTION 11 

4 and 3 

5 and 2 

6 and 1 
3 and 4 
2 and 5 
1 and 6 

from which point the chances decrease 
until the number 12 can be formed in only one 
way — two sixes. This proposition applies to 
all forms of mechanical gambling, and is so 
simple in principle, and so distinct in operation 
that if we make a fair number of casts, say 
1,000, and do not make more sevens than any 
other one number, we may be positive that the 
dice are defective, or loaded. 

Therefore, if percentages hold true, we must 
attribute the surplus loss in speculation to 
mental operations. In the total results men- 
tioned, these mental operations were so errone- 
ous as to cause a loss greater than the percent- 
age itself; but, on the other hand, a certain 
number of accounts showed profits; that is to 
say, the percentage was overcome, which is 
again an obvious impossibility in true gam- 
bling. 

The conclusion is offered, therefore, that not 
only can poor methods and imperfect under- 
standing result in losses far in excess of a de- 
monstrated drawback, but that this drawback 



12 THE CYCLES OF SPECULATION 

may be overcome by other and more correct 
methods. It is difficult to understand why the 
opponents of speculation are continually harp- 
ing on these points of gambling and percentage 
as bearing particularly on operations in stocks 
or commodities. If a man buys a certain se- 
curity because it is cheap, or because he con- 
siders it cheap, and pays a certain commission 
to a broker for effecting the transaction, he is 
no more playing a percentage game than if he 
purchases a piece of real estate because it is 
cheap and pays the real estate broker a com- 
mission for his services. 

Marginal trading is another abomination of 
the anti-speculative element, but here again 
the critics do not discriminate between use and 
abuse. Trading on insufficient margin is one of 
the greatest evils in the speculative world and 
when, as is frequently the case, this evil is com- 
bined with lack of knowledge as to values and 
conditions, the result is certain loss. But what 
is objected to here is the hazy view and com- 
prehensive condemnation of all marginal specu- 
lation. The line of demarcation is usually care- 
lessly drawn. If an individual buys 100 shares 
of stock for cash, has it registered in his own 
name and later borrows funds from his banker 
with these shares as collateral, he escapes im- 
peachment as a marginal speculator; but if he 



INTRODUCTION 13 

buys on margin, and borrows from his broker 
the unpaid balance, he is a gambler. And yet 
it would be hard to point out the difference in 
the two methods. If we wish to go a little fur- 
ther afield, we may reduce a very large per- 
centage of the commercial structure to mar- 
ginal trading. We may, in short, place in this 
category every merchant who buys goods on 
credit and every man who buys real estate on 
payments, if their object when buying is to sell 
at a profit. 

It is highly probable that these contentions 
will be vigorously attacked, on the theory that 
more evil than good results from speculative 
ventures, and that therefore the whole struc- 
ture should be razed on a "greatest good to the 
greatest number" basis ; but aside from the in- 
tensely unphilosophical character of this view, 
it is not at all probable that any such thing can 
be effected unless human nature undergoes a 
radical change. Tear down every stock ex- 
change in the United States tomorrow, and 
people will be speculating, a majority of them 
foolishly, in another week.. The cure lies not 
in paternalism, but in evolution and under- 
standing. As has been said, more has been 
accomplished in recent years by the educa- 
tional crusade of the press than by all the rant- 
ings and warnings of a century. We have our 



14 THE CYCLES OF SPECULATION 

periods of reckless over-indulgence, it is true, 
but the evil is dwindling. The South Sea 
bubble would deceive a much smaller number 
of people today than it did in the days of John 
Law. 

It is the object of the present work to point 
out, so far as the abilities of the writer will per- 
mit, what essentials are required in any form of 
speculation, whether on margins, or masquer- 
ading in the guise of investment. As to this 
last distinction, it may be stated that the word 
"speculation" is herein taken to mean the pur- 
chase of any security or commodity because it 
is considered cheap, with the ultimate intention 
of disposing of the property so purchased at a 
profit. In the writer's opinion this definition 
is correct. Speculation contemplates a rise in 
price, and an accretion in principal. Invest- 
ment refers to interest returns on money. 

One of the most flagrant errors in specula- 
tion is an entirely mistaken idea as to the 
possibilities in this field. Nine men out of ten 
have a deep-rooted conviction that if any indi- 
vidual could be right in his main deductions 
for, say one or two years, he should make mil- 
lions on a small capital. This is a great mis- 
take, and leads to numerous minor errors 
which are productive of much loss in actual 
operations. The business of speculation never 



INTRODUCTION 15 

did, and never will result in abnormal profits. 
Large returns are sometimes made, it is true, 
but this fact is also true of every other line of 
business. Certain individuals grow very rich 
in Wall Street; this again is true of every com- 
mercial branch. We hear now and then of a 
million dollar coup by a Morgan or a Rocke- 
feller, and do not stop to consider the great 
capital behind it. If an individual makes five 
thousand dollars in a year's speculative ven- 
tures on a capital of twenty thousand, he is not 
considered a Napoleon of finance, but he has 
accomplished much more, in proportion to his 
capital, than Rockefeller would have accom- 
plished if he had made five millions on similar 
operations. 

In a recent conversation with a number of 
gentlemen who clung tenaciously to this idea 
of sudden riches, the writer undertook to es- 
tablish his contention. Tapes were secured 
recording the fluctuations of sugar stock during 
a twenty point decline. The skeptics were 
given a hypothetical capital of $10,000 each, 
subjected to the ordinary rules of trading as to 
margins, etc., informed that sugar would de- 
cline twenty points before it again touched the 
first quotation established, and invited to "get 
rich quick." The result was ridiculous in the 
extreme. Two of the experimenters lost their 



16 THE CYCLES OF SPECULATION 

imaginary capital trying to double up and 
show large returns. The third took an unfair 
stand, by selling the maximum amount at the 
inception of the experiment and closing it after 
the 20 point decline had appeared. His oper- 
ations, therefore, proved nothing. Here was a 
case where two traders, possessed of an abso- 
lute fore-knowledge of what was to occur, lost 
everything through the fault of over-specu- 
lation and the belief that abnormal returns 
could be made if the ultimate fate of a market 
could be correctly forecasted. Even if we as- 
sume that e very intermediate movement were 
known in advance, that after a ten point de- 
cline there would be a five point advance, and 
that transactions were conducted to the full 
possibilities of both original margin and ac- 
crued profits, the result would not be the mil- 
lions which dazzle the eyes and imagination of 
the unsophisticated. But to assume any such 
trading is foolish. The factor of safety would 
be wholly absent. No wise man will ever at- 
tempt pyramiding, and no foolish man who 
does, will succeed. 

In order to clear the ground for discussion 
or study, the first thing to eliminate is this 
wholly unsupported and mistaken idea of sud- 
den riches. No matter how correct the fore- 
cast of the future may be, safety disappears in 



INTRODUCTION 17 

inverse ratio to the increased possibilities of 
abnormal returns ; and with the factor of safety 
continually ignored, the final results are bound 
to be disastrous. 

It will also be necessary to dispel another 
illusion. If the speculator imagines that he 
can operate successfully without preliminary 
hard work to fit him for the business in hand 
he is grossly mistaken. It is necessary to 
qualify in this field as well as in any other. 
Knowledge of monetary conditions, values, in- 
terest rates, and in fact, of all influences bear- 
ing directly or indirectly on the future of prices 
must be acquired and thoroughly understood. 
Ignorance on any one point may mean defeat. 
On the other hand, a study of such conditions 
means a liberal education, valuable in every 
line of business life. It may be further stated 
that the man who attempts to evade necessary 
labor and research by placing his dependence 
on tips or charts, or the opinions of others, can- 
not hope to succeed. The gambling idea must 
be put out of the question entirely, and means 
sought whereby intelligent opinions may be 
formed by both inductive and deductive rea- 
soning. 

In preparing this work the temptation to 
enter more extensively into fundamental prin- 
ciples has been great. It would be impossible 



IS THE CYCLES OF SPECULATION 

to do more than suggest a line of procedure in 
a single volume, and only the most elemental 
requisites are set forth. And not only do the 
prescribed limits of this volume forbid any ex- 
haustive discussion, but such discussion is un- 
necessary. On every subject of importance we 
have books written by men of soberness and 
judgment, each a specialist in his field. A 
bibliography has been appended to this volume 
suggesting such works as are considered help- 
ful. In this bibliography an attempt has been 
made to choose such books as are clear and 
simple, rather than those which are profound. 
If the task as herein outlined, appears for- 
midable, it may be said that it is absolutely 
necessary, and not so difficult as may appear. 
Before the student has entered far into the sub- 
ject, he will find the matter interesting and 
will very quickly realize that the well grounded 
contentions and discussions of men who ex- 
amine and diagnose economical questions cor- 
rectly, are of more value than the combined 
tips, guesses and poorly based opinions of all 
the professional speculators and gamblers 
from one end of Wall Street to the other. This 
form of basic knowledge is just as important 
to the active trader as it is to the investor. If 
he can correctly judge of the general trend of 
future prices, he may operate safely with that 



INTRODUCTION 19 

trend instead of floundering around helplessly 
in a slough of indecision, or possibly working 
directly against the current. If, for example, 
he has good solid reasons for expecting ulti- 
mately higher prices, he will not be disturbed 
by temporary reactions and, instead of being 
frightened out of his position through ignor- 
ance, he will take advantage of such reactions 
to make his purchases or cheapen his holdings. 
Knowledge, in this particular line as in all 
others, is the foundation of successful ventures. 



II 

The Cycles of Speculation 

The great upward and downward swings of 
speculative prices, herein referred to as cycles, 
have invariably preceded or accompanied 
periods of business inflation or depression. 
This fact, apparently € so elemental, is often dis- 
regarded by that very large class of specula- 
tors which is continually looking for artificial 
and unpregnant explanations of price changes. 
There can be no doubt as to the existence 
of manipulation, and, in rare cases, movements 
of considerable importance may be traced to 
this source alone ; but manipulation consists, in 
its fullest sense, of the tactics resorted to for 
the purpose of liquidating shares in anticipa- 
tion of a decline which the long-distance think- 
ers believe to be inevitable ; or, per contra, for 
the accumulation of shares prior to a great re- 
covery or readjustment. It is seldom em- 
ployed as a positive means of enhancing or de- 
pressing values. In fact, to do either by mere 
manipulation would be an impossibility. JEvery I 
observer of great speculative movements knows 

21 J 



22 THE CYCLES OF SPECULATION 

/ that at the highest point of a movement, and 
/ during the first half of a decline everything 
appears roseate, while at the lowest prices, and 
during the first half of an advance, the reverse 
is true. \ 
There are several contributory causes which 
V^-operate to produce these false appearances. 
The primary cause is the curtailed perspective 
and imperfect logic of the public investor or 
speculator. The most difficult thing to drill 
into the mind of the unsophisticated is the 
fact that speculation cannot possibly be 
successfully based on appearances which are 
open and obvious. Such a process is a flat con- 
tradiction of the word itself. It is unseen 
future developments or, in some cases, hidden 
and submerged present truths which must be 
consulted. Yet we find a great majority of the 
public element who seek riches in the specula- 
tive arena, constantly harping on the large busi- 
ness of certain corporations, and the excellent 
state of general trade as a reason for purchas- 
ing shares. These factors have, in all proba- 
bility, been discounted in current prices. Gen- 
erally speaking, the present is of no more use 
than the past in forming opinions of future 
price changes. It is a certainty that sales of 
stocks could not be made in great volume to 
good advantage unless everything did look 



THE CYCLES OF SPECULATION 23 

rosy, for who would purchase shares at high 
prices if the future appeared threatening or un- 
propitious, and who would sell holdings in the 
face of encouraging and inspiriting prospects. 

This brings us to the second phase of the 
question — the creation of false appearances, 
which is, in truth, the highest form of manipu- 
lation. When so-called inside selling is going 
on, great business is reported by railroad and 
producing corporations; dividends are in- 
creased, and public expressions of confidence 
emanate from men of high standing in the 
financial world. The effect of all this expressed 
optimism is, market-wise, of a negative char- 
acter. When it is most prevalent and most de- 
cisive, prices halt or even decline. This period 
and action represents selling at the only time 
when advantageous selling is possible. In the 
main the truth only is told about existent con- 
ditions, possibly about the near future. Noth- 
ing else is necessary ; but nevertheless the sell- 
ers are anticipating, not the events of the next 
week or the next month, but of a more remote 
period where they see probabilities in regard to 
which a discreet silence is maintained. 

The constantly recurring cycles of prices, the 
alternate inflation and depression, must there- 
fore be traced to something far more important 
than the grossly exaggerated potentiality of 
mere manipulation. 



24 THE CYCLES OF SPECULATION 

Principal Crises of the Last Century. 

That crises in the financial world have oc- 
curred at more or less regular periods is a mat- 
ter of history. Since the beginning of the nine- 
teenth century ten of these readjustments have 
occurred. In 1812, after ten years of prosper- 
ous conditions preceding the war of that year, 
business fell off materially. The real panic, 
however, occurred in 1814. Washington was 
taken by the British on August 24th, 1814, and 
suspension of specie payments was general in 
the following two weeks. 

In 1824, the protective tariff enactments were 
followed by general inflation in all lines of busi- 
ness. Two years later, in 1826, a general de- 
pression occurred with many failures. The de- 
pression at this period was even greater in Eng- 
land than in the United States, and many 
writers attribute the entire trouble to European 
business reverses, but it is probable that we 
had been living beyond our means and that this 
fact, to say the least, aggravated the disturb- 
ance. 

In 1837, after six years of good times, an- 
other crisis occurred. This depression was 
attributed to various causes. The great New 
York fire of 1835, the loss of charter by the 
United States Bank in 1836, and the calling in 
of $37,500,000 of government deposits by 



CRISES OF THE CENTURY 25 

President Jackson, are all given due consider- 
ation. The actual panic, however, did not ap- 
pear until May 10, 1837. All the banks sus- 
pended specie payments, and securities, — in 
fact all properties of whatever kind — fell 
rapidly in value. The most plausible expla- 
nation of this crisis is overspeculation in land. 
The other evils mentioned might easily have 
been rectified by the recuperative powers of a 
growing country, had the more serious element 
of wild inflation been absent. 

In 1848, after a long period of prosperity, 
broken only by the war with Mexico, business 
inflation and overspeculation again brought 
about the logical and inevitable result. Europe 
also had been over-speculating again and a 
crisis in England soon extended to the United 
States. Liquidation was drastic and the de- 
pression lasted until the discovery of gold in 
California began to bear fruit. 

In 1857, one of the most serious, as well as 
the most short-lived, of our crises occurred. 
Again speculation was extreme; December, 
1856, marked the high point in securities, and 
prices continued to sag for some months; but 
it was not until August, 1857, that a panic oc- 
curred. 

In 1864, came a crash in speculative prices 
following tremendous inflation. Between April, 
1864, and April, 1865, leading stocks declined 



26 THE CYCLES OF SPECULATION 

from $50 to $100 per share. As the inflation of 
this period was caused largely by the high 
prices of commodities and greatly increased 
railroad earnings occasioned by the events of 
the Civil War, most writers on the subject do 
not consider it in their theoretical discussions 
of crises. 

In 1872, another boom was on, particularly 
in Iron and Steel. The Chicago and Boston 
fires had not been as effective in breaking stock 
prices as might have been expected. Prices of 
stocks began going down materially in April, 
1873, and in fact had been rather "toppy" dur- 
ing the preceding years. This panic, like most 
of the others, was preceded by enormous 
speculation and high prices. It is interesting 
to note that while stocks were declining, gen- 
eral business was booming. The trained minds 
of Wall Street were learning to discount the 
future at longer range and more accurately. 
The iron and steel business exceeded all former 
records in 1873, both in the matter of normal 
price and actual production. 

In January, 1884, numerous failures and sus- 
pensions produced a panic which was in reality 
the culmination of a long decline. As in 1872, 
this panic was preceded by enormous general 
business. The steel and iron trade again broke 
all records in 1882, and other lines were equally 
prosperous. 



CRISES OF THE CENTURY 27 

In 1893, the period of prosperity which fol- 
lowed the enactment of the McKinley bill was 
rudely broken. Speculation had been rampant, 
as usual. On May 4th, 1893, the National 
Cordage Company went into the hands of a 
receiver. Only a year prior to that date, this 
corporation was paying 12% in dividends and 
the stock was selling well above par. There 
were many badly inflated stocks and many 
rotten spots in the speculative stock markets. 
The Distillers and Cattle Feeders shares fell 
from $70 to nothing, and were assessed $20 per 
share. The aggregate liabilities of business 
failures in 1893 were almost $350,000,000, over 
20% greater than in 1892. Banks failed right 
and left, and several leading railroad companies 
went into the hands of receivers. 

In 1903, another period of depression oc- 
curred. It is doubtful if this period can be 
rightly classed with the other crises already 
•mentioned, for it was more in the nature of a 
drastic but orderly retrenchment than a panic, 
and the bull stock market of 1902 was again in 
full swing early in 1904. 

In thus briefly detailing the crucial points of 
nineteenth century financial affairs, there is no 
intention of entering an economic discussion, 
and no pretence of giving anything like a com- 
prehensive history of the events preceding or 
following their recurrence. PThe subject here 



28 THE CYCLES OF SPECULATION 

discussed is speculation, and the object sought 
is to gain knowledge that may be of value in 
forming opinions as to future prices. We may 
gain some information of this character by 
analyzing the following points : 

1 — Did price declines in stocks precede, ac- 
company, or follow panics, crises, or general 
business depression? 

2 — What are the signs which usually pre- 
cede such periods? 

3 — What are the salient causes? 

4 — Can any dependence be placed in the 
regularity of these recurrences? 

On the first head it will be found that in all 
cases the top of the stock market has been 
reached prior to the actual eruption in general 
business. Stock speculation in 1814 and 1826 
was not of great volume nor importance, and 
cannot be given much consideration. 

Beginning with the panic of 1837 we find 
that the highest prices for stocks were made in 
October, 1836, while panic conditions did not 
occur until May, 1837. Preceding the panic of 
August, 1857, highest prices were reached in 
the last months of 1856. Highest figures were 
recorded in April, 1872, just one year prior to 
the panic of 1873. The stock market antici- 
pated the troubles of 1884 by 17 months of de- 
clining prices. In January, 1892, stocks be- 
gan declining and continued their downward 
course until the panic of 1893 cleared the at- 



CRISES OF THE CENTURY 29 

mosphere. In our last period of depression 
(1903) stocks had reached their pinnacle in 
September, 1902, just one year before the mar- 
ket turned for the better. 

We find therefore that in the majority 
of instances, highest prices for stocks were 
reached long before business troubles were 
openly apparent. This action represents to a 
certain extent the selling of stocks by men 
who were wise enough to foresee trouble. 

Another interesting fact in regard to crises 
is that they are usually preceded by record- 
breaking business in all directions. As iron 
and steel may be considered the best barometer 
of business conditions, the following tables are 
instructive : 

PIG IRON PRODUCTION IN THE UNITED STATES 
SINCE i860. 

Production 

Year Tons 

i860 919,770 

1861 731,544 

1862 787,662 

1863 947,604 

1864 (Depression) 1, 135,996 

1865 931,582 

1866 1,350,344 

1867 1,461,626 

1868 1,603,000 

1869 1,916,641 

1870 1,865,000 

1871 1 ,91 1 ,608 

^72 2,854,558 

1873 (Depression) 2,560,963 

1874 2,401 ,262 

1875 2,023,733 

1876 1,868,961 

1877 2,066,594 



30 THE CYCLES OF SPECULATION 

Year Tons 

1878 2.301. 215 

1879 2,741 ,853 

1880 3,835,i5i 

1881 4,144,254 

1882 4,623,323 

1883 • • 4,595,5io 

1884 (Depression) 4,097,868 

1885 4,044,526 

1886 5,683,329 

1887 6,417,148 

1888 6,489,738 

1889 7,603,642 

1890 9,202,703 

1891 8,279,870 

1892 9, I 57, 00 ° 

1893 (Depression) 7,124,502 

1894 6,657,088 

1895 9,446,308 

1896 8,623,127 

1897 9,652,860 

J 898 11,773,934 

1899 13,620,703 

1900 13,789,243 

1901 15,878,354 

1902 17,821,307 

1903 (Depression) 18,009,252 

1904 16,497,033 

1905 22,992,380 

1906 25,307,191 

It will be observed that the high record of 
production has been reached just prior to our 
greatest periods of depression, or during such 
periods. 

The second phase of the question, "what 
signs usually precede such periods?" opens a 
wide field for the student of speculative 
changes. Some inspiration may be gained 
from an examination of the two points already 
considered, i.e.: priority of price movements 



CRISES OF THE CENTURY 31 

and business inflation; but it would be ex- 
tremely difficult to use them as guides unless 
many other factors were given consideration. 
If we eliminate the element of periodicity, any 
attempt to determine the turning point by ex- 
amination of advances in prices of stocks or 
volume of production and consumption of com- 
modities is futile. Using pig iron as a ba- 
rometer we might, after production has gradu- 
ally increased from 8,623,127 tons in 1896, to 
15,878,354 in 1901, argue that a considerable 
reaction was due in this line, but we would be 
out in our calculations two years and two mil- 
lion tons. Neither can we accept the simple 
fact of a decline, or the beginning of a decline 
in iron or in any other single commodity as in- 
dicating lower prices for stocks; for however 
accurate iron may be as a barometer of gen- 
eral business, it is not at all a barometer of the 
stock market. It is practically certain that 
stock prices will move either to higher or lower 
prices long before any reason^ for such move- 
ments are apparent to the ordinary observer. 
Future stock market movements are largely 
deductive, and are not founded upon ordinary 
industrial statistical evidence. 

There is, however, one method by which 
some light may be thrown upon the subject of 
probable movements. A careful study of mone- 
tary conditions and expansion of credits will 



32 THE CYCLES OF SPECULATION 

frequently reveal dangers not apparent in any 
other direction. It is scarcely necessary to say 
that such examination must not be confined to 
one quarter, such as New York City; or to one 
country, such as the United States. A com- 
prehensive view of the world's monetary con- 
ditions will be necessary. This subject is dealt 
with more fully in another chapter. 

There is much difference of opinion among 
writers and students of economics as to the 
cause of depressions. Bagehot attributes it to 
the fact that, "at particular times a great many 
stupid people have a great deal of stupid 
money." This writer contends that occasion- 
ally money accumulates abnormally and craves 
an investment outlet. To use his own words, 
"This blindl capital seeks for some one to de- 
vour it, and there is plethora ; it finds some one, 
and there is speculation; it is devoured, and 
there is a panic. ,, Horace White attributes 
panics to over-speculation. Bonamy Price 
says: "A vast outlay in new enterprises in- 
volving a large consumption of food and ma- 
terials, whether in the way of pure waste or 
temporary unproductiveness, ought always to 
suggest a feeling of danger. This excess occurs 
in seasons of prosperity." John B. Clark holds 
that it is due to an excess of production ; or an 
excess of production in one line with a de- 
ficiency in others. Leone Levi: "The main 



CRISES OF THE CENTURY 33 

cause for the occurrence of crises is the sudden 
realization of an insufficiency of capital to meet 
present demands." Thorold Rogers says : "The 
cause exists in the function of exchange ; in the 
expectation of unreasonable profits and in in- 
correct calculation." It was the late Henry 
George's theory that depressions are brought 
about by higher prices of land. He held that 
workers thrive as they have easy access to 
natural opportunities for production, and are 
impoverished as they are deprived of such 
opportunities. All periods of speculation and 
inflation end in higher land values. Landlords 
call for a larger percentage of the product than 
workers can afford to pay, and both labor and 
capital become idle until there is a readjust- 
ment. Prof. W. S. Jevons, and a host of others, 
attribute crises to sun spots and their effects 
on harvests. And so on through a long line 
of theories. 

The consensus of opinion appears to favor 
the theory of over-speculation, whether in 
realty, commodities, or the shares of corpora- 
tions, and this leads up to the question of 
periodicity. That there has been a recurrence 
of these troubles about once in ten years is not 
a debatable question. Nevertheless, many 
thinkers scout the idea of this repetition at 
marked periods being other than fortuitous. 
As prominent a student as Thorold Rogers, for 



34 THE CYCLES OF SPECULATION 

example, ridicules the theory of periodicity. 
Many hopeful people believe that in time we 
will find means to avoid these bad spots; that 
the United States is a young and enthusiastic 
country, and that we will gradually sober down 
in both methods and effects. But against this 
theory lies the cold fact that these cycles have 
occurred with as charming regularity in France 
and England as they have in our own country, 
which would indicate that age and seasoning 
does not produce any appreciable improve- 
ment. 

It is probable that the most acceptable theory 
as to the causes of periodicity is the psycho- 
logical contention. Human nature is much the 
same throughout the civilized world. We suf- 
fer from a panic and a period of depression, 
and we grow wary and conservative. This 
course results in sound methods and accumu- 
lation. The business structure rests on a firmer 
foundation. Gradually the hard lessons of the 
past are forgotten by the older generation, and 
are entirely unlearned by the new business 
generation, all of whom are optimists. Again 
we expand our enterprises, again fortune favors 
us; the appetite for gold grows greater as 
wealth accumulates ; men who were economical 
and satisfied on modest incomes now live ex- 
travagantly, and some of them dream of mil- 
lions. Capital is spread out thinly. Story after 



CRISES OF THE CENTURY 35 

story is erected on one foundation, and that 
foundation, sound enough at first, eventually 
gives way. Then we must begin our careful 
building once more. The ten year periods, 
therefore, may represent with more or less ac- 
curacy, the lapse of time between wisdom and 
folly, — the yard-stick of human intellect and 
experience. 

Many of the writers on this subject seem to 
strive for tangible reasons for each depression. 
They dive into the subject for a cause and 
emerge with an effect, or a handful of effects. 
For example, the depression following 1893 
was not caused by the failures of banks and 
other business institutions, but the failures 
were caused by the depression. It matters not 
that the failures ante-dated the bad conditions. 
Again, the depression itself was produced by 
prior inflation. It was the illness after over- 
stimulation. And so, in turn, we can ask what 
caused the inflation; and the answer is "Human 
greed and human folly." This last analysis 
brings us around in a circle to the original 
theory of a psychological cause. 

It is submitted that a dependence on period- 
icity of any kind, either in the ten year cycles or 
in year-to-year events is fraught with danger 
and cannot be adopted by the speculator. It is 
chart-playing pure and simple, and the man 
who disposes of his stocks for no better reason 



36 THE CYCLES OF SPECULATION 

than that a depression appeared ten years ago, 
is liable to find himself in the position of the 
chart-enthusiast, who, after tracing a marked 
uniformity in movements for a period of years, 
runs into reverses and loses all. 

It is not meant to say that a knowledge of 
the past is without value. Inductive reasoning 
is almost as important as deductive reasoning, 
when properly employed and applied. If we 
scrutinize the history of past crises and great 
movements with a view to determining the 
salient causes therefor, a great deal has been 
gained, for we may apply this knowledge to 
existent elements lying parallel to those which 
caused trouble in the past, and thus decide 
what is probable in the future. If, on the other 
hand, we place dependence on mere repetition, 
we gain nothing in education and stand in con- 
stant danger. 

It may be contended that the active specu- 
lator has little to do with ten year cycles or 
their causes, but this is not the case. A correct 
understanding of the reasons for the great 
cycles will simplify the study of smaller inter- 
mediate movements. Much knowledge appli- 
cable to year-to-year movements will be gained. 
Monetary troubles, for example, occur almost 
annually, and their effects on market move- 
ments are usually, (not always), similar to 
those of more widely separated periods, but, of 
course, in a lesser ctegree. 



in 

The Gold Supply 

It may be stated without hesitation that the 
effect of the increasing supply of gold upon 
prices of all bonds, shares, or commodities 
which may be classed as speculative, is more 
decided and certain in its operation than any 
other single factor. The process of readjust- 
ment due to this cause; "would be slow and 
regular if the principles at issue were uni- 
versally and clearly understood. Not being 
generally recognized, however, the changes 
wrought by what is naturally an insidious fac- 
tor are, at times, spasmodic and feverish. It 
is a remarkable fact that whenever a revolu- 
tion occurs in any economic or financial pro- 
cess which is, by its nature, concealed or re- 
condite, its existence and influence are dis- 
covered by a number of students simultane- 
ously but independently. Important reversions 
or modifications may be submerged for a long 
period, and suddenly light is offered from all 
parts of the thinking world. It is probable that 
this intellectual phenomenon extends to, or is 



91 



38 THE CYCLES OF SPECULATION 

communicated to the financial world, and that 
marked and drastic changes in the affected 
quarters represent a belated recognition of 
forces hitherto unknown, and the readjustment 
of affairs by those who, see first and furthest, 
that the operations of, this minority will be 
important goes without saying. The faculty 
to grasp fully and quickly anything salient 
bearing on financial affairs is the ground-work 
of riches and consequently the trained minds of 
great holders of shares or commodities will re- 
spond most readily to sound basic arguments, 
and the greatest holders can. of ten make of their 
knowledge a two-edged sword. For example, 
certain large holders of bonds, recognizing the 
fact that increasing gold production means 
higher interest rates, and consequently lower 
prices for bonds, would be able to dispose of 
bonds to advantage because of the apparent 
general prosperity growing out of this same 
production of gold. It may be assumed that in 
pointing- out in^interviews, etc., this reign of 
prosperity, the gentlemen in question would 
modestly omit to mention that the same in- 
fluences which were causing high prices and 
much business in some quarters, were working 
damage in others. 

Something of this kind has been going on in 
otir bond and stoclr markets of late. The in- 
evitable influence of gold on prices has made 



THE GOLD SUPPLY 39 

itself slowly felt for a long period, but it is onV 
in the last year that a considerable number of 
individuals whose operations are of importance 
in the financial world have come to recognize 
how powerful this influence is. Price changes 
in divers securities and commodities hitherto 
unaccounted for, or attributed to wrong in- 
fluences, have suddenly been explained to a 
number of important financiers, and a correct 
understanding of the problem has undoubtedly 
resulted in radical readjustments in some quar- 
ters. With that pertinacity in error which 
seems to distinguish the ordinary speculator, 
he has, however, gone on attributing these pro- 
cesses of equilibration to causes which have 
only a limited bearing on the case. The recent 
heavy decline in bonds and stocks, for exam- 
ple, was popularly ascribed to political and 
legislative action against railroads. Scarcity 
of money was given second place in these de- 
ductions, and gold production third place, or 
no place at all. If we reverse this order of 
importance and give gold production first 
place, monetary affairs second place, and polit- 
ical affairs third place, we are nearer the truth. 
It looks a little ridiculous that the scope of 
intelligent perspective should be blocked by 
three thousand miles of water, and that the 
unthinking majority who ascribe our decline 
in bonds to local politics should have failed to 



40 THE CYCLES OF SPECULATION 

recognize so potent a fact as that the decline 
was world-wide; but such is the case. The 
readjustment in bonds was due . to excessive 
pver-production of gold, and it may be safely 
assumed that so long as this over-production 
continues to increase rapidly, bonds will con- 
tinue low in price or, what amounts to the 
same thing, interest rates will remain high. 

As to the importance of a correct under- 
standing on this subject of gold supply and its 
influence on prices, I quote from Mr. Byron 
W. Holt's book "The Gold Supply and Pros- 
perity," which, I may add, is used as the text 
book for this chapter. Mr. Holt says: 

'This is the great problem that now confronts the 
financial world and demands solution of every in- 
vestor. Not to solve it may mean- great loss and 
possible failure. To soive it means success and 
greatly enhanced wealth for all who now have either 
a. fair share of this world's goods or who have credit 
and can intelligently go in debt for a largfe amount." 

As speculation or investment-speculation, as 
defined in the introduction to this book, are the 
subjects under discussion it is the intention to 
take up, in turn, such points as bear particu- 
larly upon price changes of speculative shares 
and commodities influenced by our increasing 
supply of gold. The main points to be con- 
sidered are as follows: 

1 — The effect upon bonds and preferred 
stocks having a fixed rate of income* 



THE GOLD SUPPLY 41 

2 — The effect upon common stocks of rail- 
road corporations. 

3 — The effect upon stocks of industrial cor - 
porations. 

4 — The effect upon speculative commodities 
— wheat, corn, oats, cotton, etc. 

For the' purpose of argument it will be as- 
sumed in this discussion that our supply of 
gold is rapidly increasing. We know that such 
has been the case in recent years, and it is the 
opinion of most students that this increase may 
be confidently expected to continue. To quote 
again from the work already mentioned : 

"Both the output and supply of gold are likely to 
increase for many years. 

"While the future output of gold is, of necessity, 
unknown and uncertain, there is great unanimity of 
opinion, among mining experts, on this point. It 
appears to be generally recognized that, during the 
last twenty years, the industry of gold mining, or 
rather of gold production, has been established on a 
very different and much more certain basis than any 
previously existing. No longer is the output of gold 
dependent mainly, or even largely, upon placer min- 
ing and the chance finds of 'free' gold. The sup- 
ply of gold, in rock, sand, clay, and water, being in- 
exhaustible, it is now possible, by machinery and 
metallurgical processes, to extract gold, in paying 
quantities, from many forms of these vast store- 
houses. To such an extent is this true that the 
future supply of gold is even more secure than is 
that of coal, iron, lumber, wheat or cotton. 

"Even if prospecting were to stop and attention 



42 THE CYCLES OF SPECULATION 

were to be devoted only to the goI3 mines and 
bodies already discovered, and geologically in sight, 
it is probable that the output of gold would continue 
to increase for many years. As Mr. Selwyn-Brown, 
a gold mining expert, tells us in his very interesting 
article, 'as the rich surface deposits are being 
worked out, improvements in mining and metallur- 
gical processes are enabling poorer and poorer de- 
posits to be worked.* That is, improvements in 
'stamp mills,' cyanide mills, dredging machines and 
other gold extracting apparatus and processes are 
being made so rapidly that it is, every year, becom- 
ing profitable to work lower and lower grades of 
ore, sand and earth. As the grade declines the 
quantity in sight increases rapidly. In fact there 
are almost literally mountains of lcto grade gold ore 
that can even now be worked profitably. Some of 
the largest, most productive and most profitable 
mines of today contain ore averaging less than $3 
and, in some instances, only $2 of gold per ton. 

"The supply of such ore being inexhaustible the 
output depends upon the number and size of the 
mills employed to extract the gold. It is reason- 
ably certain that, for years to come, the improve- 
ments in methods and processes of mining will 
more than keep pace with both the decline in the 
quality of the ore and the increase in the cost of 
mining due to rising prices and wages^ occasioned 
by the depreciation of gold. 

"In view of all the facts, Mr. Selwyft-Brown's 
conclusion that 'a progressive increase each year 
may confidently be expected* is couservative. This 
conclusion, is almost a certainty, The uncertainty 
lies in the possibility, if not probability, either of 
discovering many important new mines in the prac- 
tically unexplored parts of every continent, or of 



THE GOLD SUPPLY 43 

making improvements that will radically reduce the 
cost of extracting gold. In either case the increase 
in the output of gold might be not simply ajrtfhmet- 
icaily but geometrically progressive." 

Admitting that the question of gold produc- 
tion is debatable, it remains for the future to 
develop any radical change, and it will be 
necessary for the student to decide this point 
for himself either by the light of facts as yet 
not established, or by accepting theories as yet 
not convincingly erected. If a change occurs, 
or may reasonably be expected, an understand- 
ing of the subject from the positive side of the 
question loses none of its value. The prin- 
ciples involved could be as successfully applied 
in reading the probable future by modifying 
or reversing effects, and reconciling them to a 
modification or reversal in the cause. If, for 
example, we accept the theory that increased 
gold production means advancing commodity 
prices, and find reason later to believe that gold 
production will cease to maintain its ratio of 
increase, we may alter our views accordingly 
so far as this single influence is concerned. 

1 — The effect of the increasing gold produc- 
tion on bonds and preferred stocks having a 
fixed rate of income . 

In this division of the question the crux of 
the whole matter is interest on money. The 
question might, in fact, be stated thus : "What 



44 THE CYCLES OF SPECULATION 

is the effect of increasing gold supply on 
money interest rates?" and having solved that 
problem, the original inquiry is answered. 

To reach a reasonable solution we must first 
examine the effect of an unduly increasing sup- 
ply of gold on commodity prices. Over-pro- 
duction in any quarter inevitably leads to lower 
prices. Gold being a fixed standard cannot de- 
cline in figures, but it does so in fact. That is 
to say, the flexible prices of things which gold 
will buy rise to fill the gap. Thus, since 1896, 
prices of commodities have risen 50%. The 
man who loaned money ten years ago finds its 
purchasing power impaired 33 1-3%, when it is 
returned to him today, for the reason that com- 
modity prices having advanced 50% in the in- 
terim, his dollar will now buy only 66 2-3% 
of what it would buy in 1897. This impairment 
<if principal will be covered, in part at least, by 
interest rates. This effect, if not recognized 
and arbitrary would adjust itself automatically, 
regardless of whether or not investors recog- 
nize the influence of changing values of gold^ 
for moriey, finding higher returns in other quar- 
ters, would speedily desert the long-term, 
fixed-interest investment field, and prices of 
such Securities would decline through lack of 
demand. 

On the subject of interest rates Mr. Holt 
says: 



THE GOLD SUPPLY 45 

"But there is another reason why interest rates 
should be high when prices are rising. When 
money is shrinking in value interest rates should be 
high to make up, or partly make up, the losses on 
the principals of loans. To illustrate: Suppose that 
prices are rising 10% a year. This means that the 
purchasing power of money is declining about 10% 
a year. Suppose, then, that $100 were loaned for 
one year at 5%. At the end of the year the lender 
would have $105; but with this $105 he could buy 
only about as much as he could have bought with 
$95, at the beginning of the year. In reality, he has 
received no interest at all but has, instead, paid $5 
to the man for holding his $100. The man with 
money to loan cannot afford to do business in this 
way. He is usually as wise as are his neighbors, 
and fully as able to protect his own interests and to 
get all <his money is worth, either by buying real 
property, investing in bonds and stock or by loaning 
on notes or on call." 

In submitting the above contentions it must 
be fairly stated that there is some diversity of 
opinion as to the effects of gold on interest 
rates. A few writers demur to trie theory; 
others hold that the effect is nil, and one or two 
openly adopt the negative side of the discus- 
sion, and state that more money means lower 
rates of interest. The majority of recent in- 
vestigators, however, appear to be accepting 
the theory as given herein, and it may be 
added that prices of the class of securities 
considered have borne out the hypothesis faith- 
fully, and that the minority have failed to offer 



46 THE CYCLES OP SPECULATION 

convincing explanations of this readjustment. 
It will not do to point to the fact that money 
has been fully employed in constructive rather 
than investment fields of late ; for while this is 
true enough, it does not explain why gilt-edged 
bonds such as British Consols have declined in 
value, while stocks and shares which did not 
bear the onus of circumscribed returns have 
advanced. There are, of course, contributory 
causes: the Labor-Socialistic Government in 
England no doubt affects the prices of consols, 
but this influence is specific, and loses most of 
its force when we consider that not only these 
particular securities, but practically all others 
of their class the world over have suffered a 
radical decline. In other words, interest rates 
have grpwn comprehensively higher. The 
theory appears sound, is borne out by events, 
and mere denial does not weaken it. It 
may well be accepted until its opponents suc- 
ceed in giving us something more convincing 
in its place. 

In support of "the theory, Mr. HoR repro- 
duces the following table of British bonds from 
Moody's Magazine for October, 1906. 

PRICES OF BRITISH INVESTMENT BONCS. 



British Consols. . . 2 J 

Met. Consols 3 J 

London County... ^ 



1906 


1905 


1904 


1896 


86J 


8oi 


88J 


*H35 


102 


104 


104* 


I28f 


88£ 


94i 


93 


128! 



THE GOLD SUPPLY 42 

Yo 1906 1905 1904 1896 

Leeds 4 108 109 111J 130^ 

Liverpool 34 107 109 109 144I 

Manchester 4 123 128I 124I 159 

New South Wales. 3§ 100$ 100 96 112 J 

Queensland 3I 99§ 99 96 in| 

Canada 3 $8£ 100J 97 107J 

Cape 3i 97 98 95 120 

Lon. & N. Western 3 93 96 95 124I 

Midland 2 J 76 79 78 ti24i 

Oreat Western 4 123 127 123 \ 164 

Average 3.3 100.2 101.8 *oo.c. 128.4 

"*Then2##. tThen3%. 

"Thus," comments the writer, "these 13 British 
bonds, supposedly the safest and least speculative 
of all securities, have declined an average of over 
28 points in ten years. Considering incomes and 
present prices, the unfortunate investors in these 
bonds have not only received less than 1% on their 
investments, during the last ten years, but, should 
they sell their bonds, they would find that the pro- 
ceeds have lost 30% of the purchasing power of a 
similar amount ten years ago. Altogether, they 
have suffered a net loss, over incomes, of more than 
20%, or over 2% a yean" 

There are other economic influences affect- 
ing interest rates through gold x supply, but the 
one given appears to the writer the most dU 
rect and forcible when applied to readjustment 
of prices to income. 

In weighing the influence of increasing gold 
'production and its effect upon interest rates 
through the advancing prices of commodities, 
the student is liable to fall into gm grave errort 



48 THE CYCLES OF SPECULATION 

He may perhaps jump to the conclusion that 
gradually advancing prices of commodities 
mean gradually advancing rates of interest. 
This is not at all the case. A sustained ratio 
of advance means sustained high rates of in- 
terest — nothing more. In order to make this 
clear let us go back to the original principle. 

Increasing prices for commodities mean an 
impairment of the purchasing power of money. 
If the purchasing power of money is impaired 
2% per annum through increasing prices of 
commodities, and the normal rate of interest is 
4%, we can cover the deficiency by making the 
interest rate 6% and leaving it there as long 
as this ratio of impairment is maintained. 
In other words the man who loans $1,000 at 
6% loses $20.00 per annum in the impairment 
of capital and receives normal interest of $40.00 
per annum and $20 extra to cover his loss in 
capital. Strictly speaking the extra 2% is not 
interest at all, but an amortization payment. It 
matters not how high prices ultimately go, he 
receives each year a bonus sufficient to cover 
his loss in capital, and the interest rate re- 
mains 6%. 

Therefore, if prices of commodities advanced 
for ten years and then ceased to advance, but 
were maintained at the highest figures reached, 
interest rates would fall because there would 
be no further impairment of capital, and what 



THE GOLD SUPPTY 43 

was formerly amortization, would become 
usury. On the other hand, if a new ratio of 
increase should occur in commodity prices 
and they should advance 4% per annum, inter- 
est rates would, if fully adjusted, reach 
8% — 4% for normal interest, and 4% for im- 
pairment of capital. 

2 — The effect upon Common Stocks of Rail- 
road Corporations. 

Here the effect of high interest rates is, or 
in time may be, offset by returns in the form 
of dividends, undivided profits, improvement of 
property, or the fact that income is not limited. 
But there is another trouble, and a serious one, 
for which the gold supply is responsible. 

If the increasing supply of gold is responsible 
for higher commodity prices it must be at once 
apparent that the building, equipment and 
maintenance of railway properties costs more 
and more as all commodities, including labor, 
advance in price. This would be all right if 
the selling commodity, i. e. : transportation, also 
advanced proportionately in price; but it is so 
difficult to override popular prejudice and 
widespread misunderstanding on this point, 
that we find continued agitation and legislation 
not only against advancing rates, but with a 
view to reducing those which already obtain. 
There must, of course, be a limit to this thing, 



50 THE CYCLES OF SPECULATION 

and if the cost of production continues to in- 
crease, the railroads must be permitted to de- 
mand higher prices for transportation. Other- 
wise a point would finally be reached where 
.every railroad in the country would be forced 
into bankruptcy. The great danger lies in a 
belated assimilation of this truth by the 
masses, and too much demagoguery on the part 
of politicians who do understand, but, being 
politicians, prefer to reflect the views of a ma- 
jority of constituents, rather than to enter a 
campaign of proselyting. That evils have 
been fostered and wrongs committed by emi- 
nent railroad financiers is certain ; but there is 
considerable confusion of ideas on this head. 
Over-capitalization, illegal combinations, man- 
ipulation of funds for private gain, and the 
swelling of dividends for stock- jobbing pur- 
poses, when the funds so distributed should 
have gone into improvements or surplus, have 
all played their part in arousing the wrath and 
indignation of the great majority, and they are, 
as a class, prone to jump to the conclusion that 
any and every railroad corporation is charging 
unduly high rates for its services, and making 
exorbitant . returns on invested capital. This 
has, no doubt, been more or less true in the 
past in certain cases where extremely high 
rates were made, and the apparent returns on 
money attenuated by over-capitalization; but 



THE GOLD SUPPLY 51 

this evil is gradually decreasing, and the real 
fight is, or should be, against these abuses. 
The railroads are suffering for the sins of the 
past, and may suffer still further; but the time 
is not far distant when, unless conditions 
change radically, the railroads must be allowed 
more latitude in the adjustment of rates, 

The prevalent opinion, that needed reforms 
which strike at the root of the evils mentioned 
above is a bear argument, is another popular 
fallacy. Such reforms intelligently conceived, 
and unswervingly carried out, are all in favor 
of the small shareholder. If laws can be en- 
acted which will prevent individual interests 
from plundering or misusing the funds of cor- 
porations, and which will compel these corpo- 
rations to issue reports and statements which 
are not so involved and complex as to be be- 
yond the ordinary comprehension, the small 
holder or investor will have a better show. 
But, having cured these evils, no laws can pos- 
sibly endure which contemplate curtailing fair 
returns on money, and fair profits 'through 
natural enhancement in values. 

But, however fair or cheering this view may 
appear, the fact remains that it will be slow in 
its acceptance and slower in its operation. We 
may therefore summarize the situation thus. 
Increasing production of gold brings about in- 
creasing cost of operation, and so long as cost 



52 THE CYCLES OF SPECULATION 

of operation is advanced with no corresponding 
advance in selling price of transportation, the 
ratio of profits will gradually decrease until a 
vanishing point is reached. 

In the last analysis, a probable tardy and re- 
luctant recognition of the true status of the 
case warrants the belief that for the near fu- 
ture, the railroads have a hard time ahead of 
them, and that so far as this single important 
influence is concerned, it is decidedly a bearish 
factor. 

3— The effect upon stocks of industrial cor- 
porations. 



Here we have a different proposition. Rising 
prices for commodities do not interfere with 
the earning power of corporations which pro- 
duce and sell commodities, the prices of which 
are not limited by law. In fact these corpora- 
tions are, in many cases, gainers by this in- 
fluence which tends to advance prices, not only* 
of what they buy, but of what they sell. It 
may be added, parenthetically, that railroad 
companies which own valuable coal lands, etc., 
find the bad influences already discussed par- 
tially offset by the gain from such holdings. 
The railroad company, however, may be con- 
sidered as pre-eminently a seller of transpor- 
tation and has been so regarded herein. 

The industrial corporations whose products 



THE GOLD SUPPLY 53 

are subject to regulation by law, such as gas 
and electric lighting companies, are subject to 
practically the same influences as those which 
operate against the prices of railroad stocks. 
Their cost of production advances easily and 
inevitably, and the selling price remains fixed, 
or advances with difficulty and under protest* 

4— The effect on speculative commodities — 
Wheat, Corn, Oats, Cotton, etc. 

This phase of the subject will be dismissed 
with a few words. If the contentions already 
made are accepted, it is apparent that all such 
commodities will gradually seek a higher level. 
A brief examination of statistics will show 
that' this readjustment has been going on for 
years. The gradually ascending pivotal point, 
or average price, is particularly marked -in the 
cheaper cereals, — corn and oats, and also in 
cotton. This is probably due to the fact that 
wages have not advanced as rapidly as have 
prices of living. It is found that in periods of 
hard times consumption of cheaper foodstuffs 
and textile fabrics is increased, while the con- 
sumption of higher priced commodities and 
luxuries are curtailed. The wage-earner, there- 
fore, has been in reality living in a regime of 
hard times, although this fact is easily sub- 
merged by steadier .employment, by a fictitious 
appearance of general prosperity, and the abil- 



54 THE CYCLES OF SPECULATION 

ity to spend a larger number of dollars, without 
realizing fully the loss of purchasing power in 
the dollars. 

It would be out of the question to attempt to 
enter anything like a comprehensive study of 
the question of gold production and its effects 
in a single chapter, or even in a single volume ; 
neither is it necessary to the purposes of this 
work, for the student who desires a compre- 
hensive education in this regard will find ample 
means and material ready to his hand. From 
the standpoint of investment and speculation 
alone, it is submitted that increasing produc- 
tion of gold is, to use the phraseology of the 
street, bearish on long time bonds and other 
securities yielding a limited rate of interest or 
income, temporarily bearish on railroad stocks, 
bullish on industrial shares, except as noted, 
and bullish on speculative commodities. 

At the risk of indulging in undue reitera- 
tion, attention will again be called to the 
fallacy of considering such subjects as the 
one of gold production too remote in concrete 
effects, or too sluggish in operation to be of im- 
portance to the speculator. A thorough under- 
standing of cause and effect bears upon the 
operations ot today, in that it anticipates the 
results of tomorrow, Through knowledge of 
influences of this character, serious €rror may 
be avoided. For example, one of the profound 



THE GOLD SUPPLY 55 

axioms 6P the speculative world is that Bonds 
advance first and stocks afterwards. If we 
understand why bonds have been, and are at 
present, declining we may be justified in modi- 
fying this view and considering the axiom more 
or less obsolete. He who operates an engine 
without a clear understanding of its motive 
power is likely to get into trouble, or perhaps 
be blown up. 

It may be pointed out also, that a too literal 
acceptance of the suggested effects of this or 
any other great price influence is highly dan- 
gerous. Even while gold production continues 
to increase rapidly, prices, not only of shares, 
but of all things, will overleap themselves and 
will also swing backwards to the other ex- 
treme. The cycles are not completed, until 
both zenith and nadir have been touched. 
Changes in gold production will not prevent 
declines in prices; they will, however, inter* 
fere with the regularity of the cycles. 

This chapter may be fittingly closed with the 
following list of conclusions reached by Mr. 
Holt, in the work already mentioned. These 
conclusions cover all the points herein pre- 
sented, and others which are of interest _and 
value: 

"1— That both the output and supply of gold are 
likely to increase rapidly for many years. 



56 THE CYCLES OF SPECULATION 

"2— That, therefore, the value of gold will depre- 
ciate as the quantity increases. 

"3 — That this depreciation will be measured by 
the rise in the average price level. 

"4 — That a rising price level, if long continued, is 
accompanied by rising or high interest rates. 

"5 — That high interest rates mean lower prices for 
bonds and all other long-time obligations drawing 
fixed rates of interest, dividends, or income, 

"6— Rising prices increase the cost of materials 
and of operation and tend to decrease the net profits 
of all concerns, the prices of whose products or ser- 
vices either cannot be advanced at all, or are not 
free to advance rapidly. 

"7— Rising prices tend to increase the net profits 
of all concerns that own their own sources of mate- 
rials and supplies. 

"8 — Rising prices o^ commodities tend to cause 
the prices of all tangible property to rise. This in- 
cludes lands, mines, forests^ buildings and improve- 
ments. 

"9— Rising prices of commodities and property 
tend to increase the value of the securities of corpo- 
rations holding commodities or property. 

"10 — Rising prices and cost of living necessitate 
higher money wages, though the rise oi wages will 
follow, at some distance, behind the rise of prices. 

"11— As rising prices do not mean increased 
profits to all concerns, many employers will not con- 
cede higher wages without strikes. 

"12— Rising prices and wages, therefore, mean 
dwindling profits and troublous times in many in- 
dustries, with complete ruin as the final goal. 

"13— Because wages will not rise as fast or as 
much as prices and the cost of living, there will be 



THE GOLD SUPPLY 57 

dissatisfaction and unrest among wage and salary 
earners. 

"14— Rising prices of commodities and property 
encourage speculation in commodities, stocks and 
real estate and discourage honest industry, 

"15— Thus, rising prices, by diminishing the in- 
comes of 'safe* investments in 'gilt-edged' bonds and 
stocks and by increasing the profits of speculators 
encourage extravagance, recklessness and ilirijtless- 
ness. 

"16— As rising prices decrease the purchasing 
power of debts, and thus aid debtors at the expense 
of creditors, they discourage saving and thrift. 

"17 — Rising prices, then, by promoting specula- 
tion and extravagance, increase consumption, espe- 
cially of luxuries, and, therefore, stimulate produc- 
tion. 

"18 — Rising prices, then, result in what is real 
prosperity for many industries; but what is for a 
nation as a whole, artificial or sham prosperity — the 
result of marking up prices rather than of increasing 
production. 

"19 — With prices, wages, rates and industries al- 
ways imperfectly adjusted to the ever depreciating 
value of gold, and with instability and uncertainty 
throughout the financial world, there cannot but be 
a great shifting around of values and of titles to 
property. 

"20— As this shifting is to the advantage of the 
debtors— the rich— and to the disadvantage of the 
creditors— the great middle class — it results in rap- 
idly concentrating wealth in the hands of a compara- 
tively few. 

"21— For all of these reasons a prolonged period 
of rapidly rising prices is reasonably certain tp be- 



58 THE CYCLES OF SPECULATION 

come a period of unrest, discontent agitation, 
strikes, riots, rebellions and wars* 

"22— A rapidly depreciating standard of value 
then, if long continued, not only produces most im- 
portant results in the financial, industrial and com- 
mercial world, but is likely- to result in changes of 
great consequence in the political, social, and relig- 
ious world. 

"In view of all the facts, results and possible con- 
sequences connected with the increasing "output and 
supply of gold, The Wall Street Journal was right 
when, on December 4, 1906, it said that 'No other 
economic force is at present in operation in the 
world of more stupendous power than that of gold 
production, ,J, 



IV 

Money 

From the viewpoint of the speculator, money 

conditions require constant consideration. It 
goes without saying that no sustained bull 
market is possible unless money conditions 
favor such a movement. We find that at the 
end of a period of inflation, the credit situation 
is always strained, while a general recession 
in business will usually cure the evil. 

The student may enter this large and im- 
portant branch of the subject as deeply as he 
likes. There are many excellent works deal- 
ing with the various phases of the subject, and 
the question has been so long and carefully 
studied by writers, that many important points 
have been established so definitely as to admit 
of little diversity of opinion. 

The bank statement which is issued weekly 
by the New York Clearing House, is eagerly 
scanned by traders, but it is not always the 
case that this scrutiny is thorough or enlight- 
ening. The statement at its best, cannot be 
considered more than a barometer, and its 



59 



60 THE CYCLES OF SPECULATION 

showings are by no means exact, as it is based 
on a system of daily averages. That is to say, 
the banks figure their loans, deposits, etc., for 
each day of the week, and report the averages 
to the Clearing House. This method often 
leads to a false showing. Commenting on this 
fact, Mr. S. S. Pratt in his book, "The Work 
of Wall Street," says : 

"A striking illustration of the effect of the 
law of averages upon the Bank Statement was 
given in September, 1902. The statement of 
September 20 reported a loss in cash of $7,- 
300,000, while the actual loss, so far as it could 
be estimated, was only $3,600,000. The state- 
ment of September 27th, on the other hand, re- 
ported a gain in cash of $1,790,000, while the 
apparent loss was $4,000,000. The former 
statement reported a deficit in reserve; the 
latter a surplus." 

It is the practice of many speculators to ex- 
amine the bank statement merely as regards 
the changes made from week to week, without 
reference to the more important totals. A de- 
crease in reserves is considered an evil, etc. 
There is something in this of course, but such 
methods and deductions are incomplete and in- 
sufficient. A decrease in reserves when the 
surplus is very large may be practically mean- 
ingless, while the same amount of decrease 
when reserves are small may be significant. It 



MONEY 61 

is a good deal like the difference between a 
man spending a dollar when he has a hundred, 
and spending his last dollar. 

The most important general information to 
be gained from the bank statement, is by a 
comparison of loans with deposits, and specie 
with loans. We may thus arrive at a fairly 
correct idea of the state of trade and the expan- 
sion of credits. If we find that loans are in ex- 
cess of deposits, and the percentage of specie 
small, we may, with certain qualifications, de- 
duce inflation; while on the other hand, the 
extent of liquidation may be judged in case 
these conditions are reversed. As an example 
of this process, the following historical facts 
are given. 

In 1890, twenty stocks listed on the New 
York Exchange were selling at an average 
price of about $87 per share. The percentage 
of loans to deposits was about 95% and the 
percentage of specie to loans about 20%. In 
November of that year, loans advanced to 
102% as compared with deposits, and specie 
declined to about 18% of loans. The stocks 
mentioned declined to an average price of $64 
per share, and later in 1901 to about $61 per 
share. From 1891 to 1893 there was some 
alternate improvement and retrogression in 
money conditions, all of which was accurately 
reflected in stock prices. 



62 THE CYCLES OF SPECULATION 

In 1893, the proportion of loans to deposits 
rose to about 109%, and proportion of specie 
to loans declined to 13%. The average price 
of the twenty stocks reached about $47 per 
share. (The panic of 1893). 

In 1894, the proportion of loans to deposits 
fell to 80%, and specie to loans rose to 30%. 
This was due to the liquidation of 189D. Stock 
prices showed some betterment, rising to about 
$57 per share. The severe drubbing of 1893 
had made public investors nervous, and had in 
many cases incapacitated them for stock 
market operations. That was to come later. 

In 1896, the proportion of loans to deposits 
rose to 102%, and specie to loans fell to 10%. 
Stocks reached their lowest level in July of this 
year ($42 per share for the twenty stocks men- 
tioned). 

From 1896 to 1898, a gradual improvement 
was apparent. Through all this period stock 
prices faithfully reflected money conditions. In 
July, 1898, the proportion of specie to loans 
rose to 30% and loans to deposits fell to 83%. 
Stocks began advancing and in March, 1899, 
the average price of the twenty stocks con- 
sidered, was about $85 per share. 

In June, 1900, the average price of the 
twenty stocks considered, was about $75 per 
share. The proportion of specie to loans was 
about 22%, and the proportion of loans to de- 



MONEY 63 

posits was about 90%. From January, 1901, 
until September, 1902, money conditions did 
not improve, but stocks continued to advance. 
There were large crops and a general wave of 
expansion and prosperity swept the country. 
In September, 1902, the proportion of loans to 
deposits was 99%, and the proportion of specie 
to loans about 17%. Meanwhile stocks were 
high — $128 per share for our twenty stocks. 
Conditions, though temporarily ignored, as- 
serted themselves in 1903, and in September 
of that year, the average price of the twenty 
stocks was about $88 per share; the percent- 
age of loans to deposits 101% and specie to 
loans 19%. The money situation had not 
changed materially, but the stock market was 
making a deferred payment. 

In August, 1904, the proportion of loans to 
deposits had fallen to 90% and specie to loans 
had risen to 25%. The stock market was 
steadily advancing, and in January, 1906, 
stocks reached their pinnacle — $138 per share 
for the twenty securities considered. 

It will be observed that while stock market 
movements do not always immediately reflect 
good or bad conditions in the financial world, 
the effect is ultimately felt. We are pretty safe 
in assuming that whenever loans are unduly 
expanded and the percentage of specie is 
small, these conditions must be corrected 



64 THE CYCLES OF SPECULATION 

either by a halt in business or by liquidation; 
and the word liquidation here means a clean- 
ing up in other lines, as well as in the stock 
market. It is sometimes the case that after the 
stock market has suffered a severe decline, 
there is little improvement in the monetary 
situation as shown in the bank statement. In 
January, 1907, for example, the percentage of 
loans to deposits was about 102%, and specie 
to loans about 17^/2%. The average price of 
twenty active stocks at that time, was about 
130. At the present writing (June, 1907) those 
same shares have fallen to an average price of 
about 101, and there is no appreciable change 
in the relation of loans to deposits, or specie to 
loans. On June 8th, 1907, the bank statement 
showed loans to deposits 102%, and specie to 
loans a little below 19%. This state of affairs 
would naturally lead to the belief that unless 
we are vigorously assisted by some powerful 
factor, such as good crops, we now face a 
period where either a decided slowing up or an 
actual recession in general business is impera- 
tive. On this theory, fortified or modified by 
a study of extraneous effects, the speculator or 
investor may gain a valuable knowledge of 
probable future movements in the stock 
market. If he decides that the case is a bad 
one and that a set-back in business will occur, 
he may argue that, even if stocks are low in 



MONEY 65 

price, there is little hope of a material upward 
movement in any quarter. It would also be 
evident that the industrial shares would suffer 
more in price than the railroad shares; for, 
under present conditions, a decline in the price 
of products generally helps the railroad cor- 
porations to some extent by permitting advan- 
tageous purchases. For instance, if finished 
steel and iron products decline in price, the rail- 
roads might be enabled to carry out projected 
extensions to better advantage than otherwise, 
while the manufacturing companies would suf- 
fer a considerable loss of profits. It is, of course, 
true that a recession in business is felt in all 
lines, but as the selling rate of transportation 
is more fixed than prices of commodities, and 
as the producing companies gain less by a re- 
cession in the prices of the commodities they 
buy than do the railroads, the industrial stocks 
are more adversely affected. This may appear 
as a sort of compensation for the fact that while 
rates for transportation do not advance as 
easily as prices of commodities, neither do they 
fall as rapidly in periods of depression. 

In examining the bank statement as a ba- 
rometrical showing of money conditions, it 
should be remembered that an increase in de- 
posits does not mean an increase in cash. The 
bank statement may show an increase in loans 
of $1,000,000 and an increase in deposits based 



66 THE CYCLES OF SPECULATION 

on these leans. That is to say, $1,000,000 may 
have been borrowed on commercial paper, and 
the proceeds passed to the credit of the bor- 
rowers. Commenting on this fact, Theodore 
Burton says: 

"But in the modern development of banking the 
actual money deposited is much less important in 
determining the amount of deposits, because so 
large a share of them represents credits obtained by 
loans, etc. These credits are transferred upon or- 
ders executed by depositors, and furnish a substitute 
for currency. In proportion as payments and set- 
tlements are made by checks, drafts, and bills of 
exchange, deposits maintain an increased proportion 
to the amount of currency in circulation. This class 
of deposits increases prior to a crisis rather than 
diminishes, because loans increase. 

"In the reports of national banks, there is a strik- 
ing correspondence from year to year in the volume 
of deposits and that of loans and discounts. Depos- 
its show more frequent fluctuations, but rise and fall 
in general accord with loans and discounts. This 
correspondence is easily explained. Another dis- 
tinction should be noted. Some deposits are the 
result of completed transactions, and are based upon 
the proceeds of sales made, amounts realized from 
investments, etc. Others merely represent loans or 
discounts the proceeds of which are entered to the 
credit of the borrower. Before every crisis there is 
an unusual proportion of deposits which are based 
upon loans. If in bank statements there could be 
separate colums for these two kinds of deposits, the 
information afforded by their increase or decrease 
would be much more valuable." 



MONEY 67 

This point shows the necessity of consider- 
ing not only the proportion of loans to deposits 
but of specie to loans. On this point Mr. Bur- 
ton says: 

"A continuous decrease c£ specie attended by an 
increase in outstanding discounts is always a dan- 
ger signal. The gap between the two may widen for 
months, and even for years, and may fluctuate from 
time to time, but a sudden change of large propor- 
tions, or a steady decrease of the percentage of 
specie is an unfailing indication of danger. The 
reason for this is not hard to discover. The quan- 
tity of metallic money in a country shows what part 
of its capital is available as money for the payment 
of its obligations to foreign countries, the final test 
of availability. For this last named purpose credit 
money cannot be used, but only money having in- 
trinsic value — money of the Mercantile Republic, 
as it is called by Adam Smith." 

The conclusion reached therefore, is that an 
increase in loans and discounts with no corres- 
ponding increase in cash or with an actual de- 
crease in cash, reflects a bad state of affairs, 
even when the advance in loans and discounts 
appears to be fully offset by deposits. 

There is one feature which should not be 
overlooked. The very worst state of affairs 
may be shown in the bank statement during a 
period of great commercial activity and in- 
flation in all lines. The reverse is also true. 
In 1894, following the panic of 1893, the per- 
centage of loans to deposits fell to 80% and 



68 THE CYCLES OF SPECULATION 

the percentage of specie to loans rose to 30%; 
but no bull market occurred. This was due to 
stagnation in all lines of business, a period of 
timidity and conservatism. In 1895, there were 
signs of a great improvement and the stock 
market started upward. This improvement, 
however, proved illusory and premature. 
Loans rose quickly to 95% of deposits and 
specie fell below 15% of loans. Then followed, 
in 1896, the new record of low prices. 

In studying the bank statement for its effects 
on speculative prices, surplus reserves will fre- 
quently suggest danger or safety. If surplus 
reserves dwindle too near the vanishing point, 
the possibility of necessary retiring of call 
loans is apparent. (See "Bank Statement," 
page 125). 

It is possible to gain valuable knowledge by 
a careful examination of the bank statement. 
The points made above are, of course, only of 
a simple and elemental character. We may 
go on with our examination as far as we like 
and scrutinize not only totals, but the position 
of individual banks.. Also, in order to gain a 
comprehensive perspective, it will be expedi- 
ent to examine, not only the barometer of the 
New York situation, but the condition of in- 
terior banks. However, it is a pretty good 
idea to begin with the A, B, C's. 

High rates for call money and the calling of 



MONEY 69 

loans are responsible for many sharp market 
movements. A large class of speculators figure 
that when dividend returns are high and call 
money cheap and plentiful, they have a tangible 
influence working in their favor while they are 
long of stocks. If rates for call money are 2% 
and a stock returns 6% there is, eliminating 
speculation, an advantage of 4% per annum in 
favor of the marginal speculator. This advan- 
tage is not so great in carrying stocks on time 
loans, as rates for fixed periods are materially 
higher. There is always danger of a flurry in 
call money, however, and in the event of a 
wholesale calling of loans there arises the ne- 
cessity of selling stocks, and a decline occurs. 
There is also present the element of manipu- 
lation in this quarter, and it cannot be gainsaid 
that many instances have occurred where 
funds have been suddenly withdrawn for the 
purpose of "shaking out" an undesirable follow- 
ing or of accumulating securities to advantage ; 
and on the other hand, call money has fre- 
quently been made cheap in order to encourage 
purchases. 

There are two periods of the year when the 
stock market is affected by disbursements of 
money in the form of interest and dividends. 
The two dates at which heavy disbursements 
occur, are January 1st and July 1st. It is a 
popular belief that just prior to each of these 



70 THE CYCLES OF SPECULATION 

dates, money will grow "tight" because of the 
necessary provisions made by banks and other 
corporations to meet such payments. Follow- 
ing the actual distribution of funds, it is the 
theory that a part of this money will seek re- 
investment in bonds and shares. A great many 
speculators argue that this would naturally 
produce stringency, the possible calling of 
loans, and consequently lower security prices 
in the latter half of December and June and an 
advance early in January and July. While this 
reasoning looks sound enough on its face, it is 
not at all dependable. It is certain that every- 
thing is discounted in advance of actual events 
in speculative circles, and the more widely such 
theories as the one mentioned are dissemi- 
nated, the more dangerous and inoperative 
they become. Instances are not lacking in re- 
cent years, where the technical situation grow- 
ing out of this reasoning, has not only nullified 
the theoretical action, but has resulted in actual 
reversal, i.e.: an advance just preceding dis- 
bursements and a decline at the time the dis- 
tributed funds were presumably returning 
to investment channels. Numerous shrewd 
people, anticipating an advance in January and 
July, have attempted to take time by the fore- 
lock by effecting purchases in December and 
Tune. Their buying, being of a competitive 
character, not only carries prices upward 



MONEY 71 

prematurely, but creates a \freak speculative 
long interest, subject to disappointment if 
funds do not reappear in the volume expected, 
or susceptible to attack by great manipulators. 
There is another objection to this theory of 
periodicity. If the market is dull and stagnant, 
v/ith little public interest, it behooves the large 
interests which have stocks for sale to bid up 
prices and create activity prior to the heavy 
distributions of funds. They may accomplish 
two things by this process. They make not 
only a higher level of prices at which to sell 
their wares, but create what is of even greater 
importance, an appearance of activity, pros- 
perity and a newspaper market. It is strangely 
illogical, but unquestionably true, that people 
who would flatly refuse to enter a market at 
a low level of prices will rush in to buy ten 
points higher if the factors of bustle and ex- 
citement are present. Both the doctrine of 
common-sense and the calculus of probabilities 
would establish the fact that each advance 
brings us nearer the top, and each decline 
brings us nearer the bottom ; but few men can 
train themselves away from the idea that an 
upturn already established does not indicate 
higher prices and vice versa. It is a sort of 
enthusiasm which a minority understand, how- 
ever, and make good use of. The psychologi- 
cal effect of mere excitement is one of the 



72 THE CYCLES OF SPECULATION 

explanations of the incontrovertible fact that 
the public usually buys at high prices and sells 
at low prices. 

The acceptance of* certain periods or seasons 
as a guide to either purchases or sales of 
stocks is, in the last analysis, merely a form of 
chart-playing. It is natural to evade a studi- 
ous examination of the general business and 
monetary situation and to resort to a simple, 
albeit a superficial diagnosis, which, being in- 
sufficient and incomplete, is dangerous. It is 
suggested that while the double effects of con- 
traction prior to distribution should be under- 
stood and examined, the only safe method is 
to go behind these temporary and periodical 
changes and study the whole basic structure 
comprehensively. We may find that money is 
in demand for the purpose of propping and 
sustaining an unsound business condition, and 
that it will in all probability fail to return in 
volume to the security markets. This occurred 
in January, 1907, and the believers in a "Janu- 
ary rise," were badly disappointed. Interest 
rates on money must also be given consider- 
ation. If the commercial world is striving to 
secure funds at a higher rate of interest than 
is offered on shares, money, or a good portion 
of it, will go where interest returns are great- 
est. And in this regard it may be said, that 
merely local interest rates are not always a 



MONEY 73 

good indication of money affairs in the busi- 
ness world. Not long ago, the writer, being 
suspicious of the claims of plentiful money 
and low rates in New York, investigated the 
matter through Western bankers and found 
that prime paper was being offered west of 
the Missouri River at much higher rates. This 
was made particularly significant by the fact 
that previously the borrowers had always been 
able to supply their needs at home, and that 
the loans, being offered through brokers, really 
cost about Y^o more than was apparent on 
their face. 

It is frequently interesting and instructive 
to examine the character of collateral behind 
loans, and find out how large a percentage of 
this collateral consists of stocks and like se- 
curities. Our stock market might appear to 
be in a sold out condition, when, in reality, a 
very bad technical condition obtained. The 
purely marginal speculative account in New 
York City, or other important centers, is car- 
ried on under certain flexible rules or customs 
as to the amount of money loaned on certifi- 
cates; but in cases where securities have been 
widely purchased for cash by small holders, 
and, in the event of general tightness in money 
or depression in business, made the basis of 
loans in country banks, but we have, in fact, a 
very weak marginal public account. The home 



74 THE CYCLES OF SPECULATION 

banker will loan more liberally to his towns- 
men and will scrutinize the movements of 
prices or the stages of the market less closely 
than the city banker, and the certificates 
owned by small holders and deposited as col- 
lateral may, in the aggregate, represent an 
enormous line of shares. It would be quib- 
bling to say that this situation represented 
anything less serious than a weakly margined 
public line. If the market declined materially, 
the bankers would be forced, in self-protection, 
to call for more collateral, and the result would 
depend, as in all other cases, on the ability of 
the individual holder to take care of himself. 
Such a condition existed in U. S. Steel stocks 
in the depression of 1903, and was pointed out 
at the time by the writer. The knowledge 
obtained was based barometrically on informa- 
tion obtained from a number of bankers in 
different localities. 

While interest rates for both time and call 
money are frequently fictitious, or of a tempo- 
rary and artificial nature, and no set rules can 
be laid down as to certain conditions in money 
and their immediate effects upon security 
values, it is not difficult to gain a general idea 
of underlying conditions. We have always at 
hand statistics which will reflect faithfully the 
fundamental basis of the entire world struc- 
ture. But in this important division, as in most 



MONEY 75 

other branches of speculation, we often find 
that what is really important is absolutely 
ignored, while matters of little moment are 
harped upon, or even made,, the basis of oper- 
ations. Thus, every habitue of brokerage 
offices eagerly watches the bank statement or 
the rates on call money, and knows nothing 
about the expansion of credits, even when such 
expansion has reached a point that would make 
a crisis appear inevitable. No better proof of 
this can be offered than the fact that our 
heaviest business and greatest inflation, have 
frequently gone merrily forward for a year or 
more under suicidal conditions. These con- 
ditions have sometimes been so obvious, so 
forcible, that it would appear impossible to 
view them with equanimity. In a majority of 
cases they were probably not viewed at all, 
and the thoughtful men who pointed out the 
danger have been called calamity howlers or 
pessimists. There is one great check to edu- 
cation in this direction: great financiers who 
are most conversant with actual conditions, 
seldom find it expedient to point out the facts. 
Sometimes they, themselves, wish to dispose 
of their holdings because of the obvious peril 
ahead and this process would not be facilitated 
by gloomy predictions. On the other hand, 
it is too often the case that these same gentle- 
men, finding it to their great advantage to dis- 



76 THE CYCLES OF SPECULATION 

perse sunshine until their goods are sold, point 
assiduously to the excellent business of the 
present, and neglect to touch on the irrepress- 
ible future, which, after all, is the most im- 
portant question to the investor or speculator. 



Political Influences, Crops, Etc. 

The possibility of legislation adverse to cor- 
porations is always present as a market factor, 
and at times severe declines have been recorded 
through such action. It is not always the case 
that such legislation is truly a bear factor, al- 
though it is fashionable to so interpret any- 
thing in the nature of legislative interference 
with corporate affairs. It is the writer's opin- 
ion that a great deal of misunderstanding has 
recently arisen in regard to the attitude of cer- 
tain party leaders toward the heads of great 
railroad corporations. The opinion has been 
widely fostered by opposing politicians and 
others that the credit of railroad corporations 
was being badly impaired, and the interests of 
stockholders jeopardized because investiga- 
tions were ordered as to the methods of indi- 
viduals or directorates. 

It does not appear that any reasonable man 
could, as the stockholder of a corporation, or 
as a private citizen, object to having dishonest 
or sharp practices on the part of the active 



77 



78 THE CYCLES OF SPECULATION 

management of the property in question ex- 
posed and prevented. Where it is shown that 
an individual, in his capacity as the head of a 
business, has employed his office as a means 
of juggling stocks or reaping enormous per- 
sonal gains, it cannot but be to the interest of 
stockholders to have such practices stopped. 
If the means at issue are honest and legitimate, 
the benefits reaped should go to the stock- 
holders. It is impossible to reconcile any 
other plan with equity and common honesty. 
Let us look at the matter without the mystery 
that obscures the affairs of a great corporation. 

Suppose a member of a certain firm, its man- 
ager, finding the firm in need of funds, secures 
money at a high rate, and at great profit to 
himself — is that right? Or is it the manager's 
business to work entirely in the interest of the 
partners he represents? Is it possible for him 
to legitimately acquire personal profit of any 
kind in administering the affairs of the firm? 
It is not sufficient to point out that the man- 
ager's action in securing funds redounded to 
the great benefit of the business concern, or 
that his capability and shrewdness were re- 
flected in enormous partnership profits. His 
associates in business are entitled to all, not 
a portion, of the gains secured in the manage- 
ment of its affairs. 

It is submitted that much of our recent leg- 



POLITICAL INFLUENCES, CROPS, ETC. 79 

islation which is popularly supposed to have 
injured stock values has, in reality, aimed to 
protect the small holder and throttle the un- 
scrupulous men who, while actually in their 
employ, were milking their business of mil- 
lions. Legislation which effects publicity and 
simplicity in the affairs of corporations is an 
unmixed benefit to the small investors. 

It is almost invariably the case that when a 
great decline in stock prices occurs, the set- 
back is popularly attributed to some factor 
which, in reality, had little to do with the re- 
versal. In the decline of 1907, thousands of 
people attributed the inability of railroads to 
borrow money at low rates of interest almost 
entirely to hostile legislation. Apparently 
these rapid-fire thinkers did not know or real- 
ize that interest rates had risen the world over, 
that there was not a free money market in the 
world, and that money, instead of being with- 
held from 4% issues, was fully employed in 
other lines. Such, however, was the case; 
British Consols, French Rentes, — all the choice 
securities of civilized countries had kept pace 
with the declines in our own bonds and stocks ; 
but these facts seem to be unappreciated. 

It is true that adverse legislation sometimes 
seriously impairs the value of a security. A 
public utilities company, for example, which 
is forced to reduce its selling rate, is unques- 



80 THE CYCLES OF SPECULATION 

tionably injured from an investment point of 
view. Such legislation, however, may be 
weighed correctly by a little calm consider- 
ation, and it may be said that action of this 
nature is usually for the purpose of correcting 
abuses, rather than as a revengeful and confis- 
catory attack on vested interests. Measures 
which prevent a fair return on capital will per- 
ish of their own iniquity. So far as measures 
which are formed to prevent extortion are con- 
cerned, it is impossible to criticize them. 

In order to correctly weigh the effects of 
legislative measures on security values and 
prices, we must therefore examine fairly what 
the legislation seeks to accomplish, taking care 
not to allow a contemporaneous price move- 
ment which may be due to other causes, to act 
as a verification of a false view. This error 
occurs very frequently ; in fact, one of the most 
remarkable things about speculation is that 
the true causes of great movements are fully 
appreciated by the majority only in retrospect. 

The probable market effect of legislative and 
political affairs can be correctly gauged only 
by examining the nature and importance of the 
issue in question. This is true not only of 
state and municipal action, but in regard to 
presidential elections. There is a popular idea 
that it is dangerous to buy stocks on the eve 
of a new presidential campaign, but there is 



POLITICAL INFLUENCES, CROPS, ETC. 81 

not much in history to uphold the view. True, 
in a majority of cases, a decline has preceded 
such a contest, but there have been frequent 
reversals of this action, and we have had too 
few elections to attempt any chart-playing on 
this influence. Such a guide would be em- 
pirical. 

The issues involved in a presidential contest, 
however, may sometimes influence prices. 
Here again a careful examination of facts and 
probabilities will generally uncover the truth. 
If the nominee of one party stands on a dan- 
gerous platform and the outcome of the con- 
test is in doubt, we may well dispose of shares 
if for no better reason than that the element 
of danger is present. Danger, whether or not 
it is finally realized, is a bear factor, just as 
safety is a bull factor. 

Tariff agitation should be accorded careful 
consideration by the speculator. This is par- 
ticularly true as regards the effect on indus- 
trial corporations. A reduction of the present 
tariff on Iron and Steel, for instance, would 
materially lower, if not destroy, the value of 
many of the common stocks of steel manu- 
facturing corporations. A very clear and com- 
prehensive work on this subject is mentioned 
in the bibliography on page 183. 

No cut and dried rules or suggestions can be 
offered as to the effects of political or legisla- 



82 THE CYCLES OF SPECULATION 

tive issues on prices. Each point must be 
scrutinized as it arises, and judgment formed 
thereon. Sympathetic movements will some- 
times occur because of apprehension or mis- 
understanding, but such effects will be short- 
lived. 



r 



Crops and Crop Failures. 



The question of crop failures is of great im- 
portance. It is not difficult to form a fairly 
correct idea as to the ultimate yield. The esti- 
mates of the Government sometimes go wide 
of the mark, but it must be remembered that 
they are estimates and nothing more, and that 
conditions may change somewhat after the 
figures are compiled. The speculator is fre- 
quently confused by the conflicting opinions of 
private experts. It is probably safer to disre- 
gard the various authorities and pin one's faith 
to the computations of the bureau at Washing- 
ton. These official documents have been criti- 
cized at times, and no doubt the criticism has 
been warranted, but they form our most de- 
pendable source of information and will im- 
prove as time rolls on. 

A crop failure, or a short crop, invariably 
brings forth much fallacious vaporing from the 
rooters of Wall Street. They are as bad in 
their efforts to obscure the truth as are the 
crop-killers with their fabrications. A crop 



POLITICAL INFLUENCES, CROPS, ETC. 83 

failure is a serious thing and must be faced as 
such. The contention which is always heard 
in lean seasons, that the evil has been counter- 
acted because of the large reserves of Wheat, 
Corn or Cotton in farmers' hands is ridiculous. 
Farm reserves are wealth. They have already 
found their place in the business structure. In 
many cases the money they represent has al- 
ready been spent in the form of credits. Nor 
do high prices for cereals or cotton overcome 
the evils of short production. Small crops 
mean decreased employment for laborers; a 
diminution of per capita purchasing power, 
and increased cost of living. They also mean 
smaller tonnage for the railroads, and conse- 
quently decreased earnings. 

And in examining crop prospects, we should 
consider the fact that each year's normal crop 
should be larger than the one preceding it. 
This is distinctly shown by tracing production 
back for a term of years. 

There will, of course, be fluctuations in this 
gradual increase, but the tendency is certain. 
We may also consider that as railroads are 
constantly extending their lines and increasing 
their facilities, it follows that increased pro- 
duction in the commodities they transport is 
necessary to their well being. 

And short crops the world over in the same 
year have the same elements of economic evil. 



84 THE CYCLES OF SPECULATION 

The purchasing power of the world is reduced, 
and even if we ourselves make fair crops and 
export them at high prices, the world's pov- 
erty is felt in lack of demand for other export- 
able surplus. The civilized world is too closely 
knit together in its affairs to permit of the 
entire localization of the effects of a serious 
property loss. 

A lean crop year can probably do more to 
temporarily injure the actual value of railroad 
shares than can any other single influence 
bearing on prices. Tonnage is affected both 
ways, so is passenger traffic. There is less 
grain or cotton to haul to the markets, and, as 
purchasing power has been reduced in the af- 
fected localities, there is less freight to haul 
back to the producers. In the last analysis, the 
products of a community represent to a great 
extent the mere exchange of these products for 
other luxuries and necessities, and the effect of 
decreased production is a two-edged sword, 
so far as the transporting companies are con- i 
cerned. / 

Accidents. 



The effect of accidents on stock prices has 
been fully discussed in a former work, and the 
contention offered that accidents could no 
more be provided against, or considered, in 
the investment or speculative world than in 



POLITICAL INFLUENCES, CROPS, ETC. 85 

any other walk of life. It is also thought that 
accidents are more frequently the excuse for 
movements than the cause of them. If a 
market is in a bad technical or general con- 
dition, the slightest adverse happening may 
create panic; while if the foundation is sound, 
even a great calamity, such as the San Fran- 
cisco earthquake, will cause only a temporary 
halt. The man who speculates correctly has 
little to fear from accidents. 



In the following section of this work, the 
writer has undertaken to touch on such feat- 
ures as appear of most interest and benefit to 
the speculator or investor. Some of the mat- 
ter presented, such as the question of dividend 
dates, will appear to many readers so simple 
as to be unnecessary, but it is true, neverthe- 
less, that many very elementary facts are mis- 
understood or unappreciated by a large class 
of public participators. 



VI 

Puts and Calls 

Puts and Calls, or "privileges," have long 
been popular with a certain trading element, 
either as a protection against loss in commit- 
ments already made, or as a positive method of 
trading. 

The theory and operation of privileges may 
be easily understood by considering them in 
the light of insurance, the money paid for them 
as a premium, and the funds received in case 
the privilege is exercised, as a loss paid by the 
insurance company. It will be understood, 
that in speaking of the seller of puts or calls, 
the insurance company is referred to, and that 
the buyer represents the insured party. 

The buyer of a call has the right to call for 
his shares or commodity, at the price named in 
the contract at any time before its maturity. 
The seller of a call fixes a certain price at which 
he agrees to deliver stock, specifies the duration 
or time limit of the contract, and receives from 
the buyer a certain sum or premium. 

For example: United States Steel Common 

89 



90 • THE CYCLES OF SPECULATION 

is selling at $40 per share; A, the seller, offers 
a call on $100 shares at 43, good for ten days, 
at a price of say, $100. B, the purchaser, pays 
the $100 and receives a contract from A as 
specified above. Now suppose that at any 
time before the expiration of the period named, 
Steel Common advances to 50. B can call for 
the delivery of 100 shares of Steel at 43, and 
by selling it, reaps a profit of $700, less the cost 
of the privilege, ($100), and the brokerage. 
Used as a protective measure on short sales, 
the result would be the same, as $700 would 
have been saved. That is to say, if A is short 
of Steel at 40 and it advances to 50, his call 
has acted as insurance against any loss over 
and above the $300 represented by the rise 
from 40 to 43. 

The "put" is exactly the reverse of the "call," 
and is insurance against a decline; or, in other 
words, an agreement to receive shares at a 
specified price on or before a certain date. 

Using the same illustration as before, let us 
assume that the price of Steel Common is 40, 
and that A, the seller, offers a put at 37, good 
for 10 days, at a price of $100. B, the buyer, 
is now insured against any loss which may 
accrue through a decline below 37 in the en- 
suing ten days. If he is long of the stock and 
it declines to 30, he may deliver his shares to 
A at 37, or if he has purchased the "put" as a 



PUTS AND CALLS 91 

speculation, he may buy 100 shares in the 
market at 30 and deliver to B at 37, netting a 
profit of $700, less the price paid for "put" and 
brokerage. 

One of the favorite methods of trading in 
privileges is to buy or sell against them when 
the price named is reached. For example, say 
B holds a ten day "put" on Steel Common at 
37, and the market for the stock declines to 36 
in five days. He may now buy 100 shares at 
36 on the theory that he has regained his 
original outlay of $100 and has a possibility of 
profit through market action in the remaining 
five days, while there is no possibility of loss. 
If the market advances to, say 38, he may sell 
the one hundred shares purchased, and on an* 
other decline to 37 or 36 may again purchase, 
repeating the operation indefinitely during the 
life of his put. The "Call" is, of course, made 
the basis of short sales on an exact reversal of 
this process. This fashionable form of exer- 
cising privileges is facilitated by the fact that 
"puts and calls" issued by members of the New 
York Stock Exchange, are generally accepted 
by brokers as "margins"; B having paid A $100 
for a "put," as illustrated above, could, if Steel 
declined to 37 or below that figure, buy 100 
Steel and give his broker the privilege issued 
by A, in lieu of a marginal deposit. The broker 
is satisfied, as he gains a commission, and in 



92 THE CYCLES OF SPECULATION 

the event of a further decline in the price of 
Steel can call on A to receive the stock at 37 
when the option expires. 

Another popular form of trading in privileges 
is to buy or sell half the amount named in the 
privilege when it becomes "good" through 
market action. If B holds a "put" on 100 Steel 
at 37, he may, at that price or below, buy 50 
shares. He is now in a position to profit by 
either an advance or a decline. If the price ad- 
vances to 40 he has three points profit in the 
50 shares purchased. If, on the other hand, the 
market declines to 34, he still gains 3 points on 
50 shares, for his "put" protects him against a 
loss in the 50 shares purchased and he can pur- 
chase another 50 shares at 34 and deliver to A 
at 37. In short, when he makes his 50 share 
purchase at 37, he is both short and long of the 
stock and must gain on a movement either way 
in the market price. 

A "Straddle," as the term is applied to privi- 
leges, is a combined "put and callV The pur- 
chaser gains on a movement in either direction. 
The general rule is that the gain is to be repre- 
sented by a market change representing an ex- 
cess of the amount paid for the 'Straddle." 
Thus if A sells to B for $250, a straddle on 100 
shares of Steel, when the current market for 
the stock is 40, B is in a position to gain by 



PUTS AND CALLS 93 

either an advance above 42^4 or a decline be- 
low 37^. 

The purchasers of privileges are sometimes 
perplexed by market changes which are 
brought about by dividend payments. The 
rule is that the dividend always goes with the 
stock. The simplest way to arrive at correct 
figures is, to mentally lower the price of either 
the "put" or "call," by the exact amount of the 
dividend payment. Thus, if B holds a "call" 
on Steel at 43 and a dividend of 2% is paid on 
the stock during the life of his option, his "call" 
becomes operative at 41 as the dividend goes 
to him. If he holds a "put" at 37, and 2% divi- 
dend is paid on the stock, his "put" is not oper- 
ative until 35 is reached, as the dividend goes 
to the maker of the "put." 

Privileges in grain or other commodities are 
based on the same general rules and principles 
as those on stocks. These privileges are 
heavily dealt in on wheat and corn in Chicago. 
They are designated, however, as "ups" and 
"downs" in order to evade local laws prohibit- 
ing transactions in 'puts and calls." The "ups" 
are calls; the "downs" are puts. Most of the 
grain privileges handled in Chicago, or based 
on Chicago prices, are of a day to day char- 
acter, insuring only for the next day's price 
changes. The ordinary charge is $1 per thou- 
sand bushels. For $1, therefore, the small 



94 THE CYCLES OF SPECULATION 

gambler, or speculator, may purchase, say a 
call on 1,000 bushels of wheat at 90y 2 when the 
last price recorded was 90. If wheat reaches 
91^4 during the next day's session, he has a 
gain of $10 less the cost of the "call" and 
brokerage. 

The small capital required for this form of 
trading, the fact that loss is limited to the 
original cost of the privilege, and the great pos- 
sibilities in case of extreme movements, make 
"puts and calls" very popular. It may be said, 
however, that they are, as a rule, poor prop- 
erty. The writer kept account of the transac- 
tions in "puts and calls" handled through a 
large concern for almost two years and found 
that only about 35% of the money paid for 
these privileges returned to the purchasers. 
That is to say, the profit shown to purchasers 
of "puts," "calls," and "straddles," was only 
about $350 out of each $1,000 received by the 
sellers. After deducting the item of commis- 
sion charges, it was found that the sellers of 
privileges reaped over 50% profit each year. 
The experiment referred to was based on grain 
privileges, but would probably hold good in 
stocks. The sellers of these "puts and calls" 
are among the brightest men in thesstreet, and 
when they make prices they do so on the abso- 
lute basis that they have the best of the bar- 
gain and the buyers are usually a public ele- 



PUTS AND CALLS 95 

ment. In the test referred to, there were 
never three consecutive days when either 
"puts" or "calls" were good. There was on 
one occasion in the period consulted, an ad- 
vance of over 20 cents a bushel in wheat in 
three days, but "calls" were good only on the 
first day of the advance. On this occasion the 
"calls" were good for about 2 cents per bushel 
on the first day's rise, but the sellers offered 
nothing for the second day, except at prices far 
above the market, and although the market ad- 
vanced 6 cents per bushel, wheat was not 
"called." On the third day, prices for "calls" 
were prohibitive, ranging from ten to twenty 
cents above the closing price and again wheat 
was not called, although the market advanced 
8% cents. 

In the accounts examined, one seller of privi- 
leges on wheat had an open order to sell 100 
puts and 100 calls every day at the ruling 
price. He thus received $200 daily and invari- 
ably "took his loss" whenever the privileges 
operated against him. That is to say, if wheat 
closed one cent per bushel above the call price, 
he would be called for 100,000 bushels on his 
privileges, making him short that amount of 
wheat. This he bought in at once and pocketed 
a loss of $1,000 less the $200 received. Al- 
though he accepted some severe losses now 



96 THE CYCLES OF SPECULATION 

and then, his account showed over $30,000 
profit on a year's business. 

Another account was operated on a different 
principle by the seller of privileges and re- 
sulted in even larger profits. This individual 
would sell ten "puts" and ten "calls" on wheat 
each day. In the event of his being called, i.e.. 
short of the wheat, he would, on the next day 
sell no "calls," but 20 "puts." In the event of 
a decline below the "put" price, he had enough 
short wheat to protect ten of his "puts" and in 
reality automatically close out his ten thousand 
short, frequently at a profit. As has been 
stated, his profits were greater than in the first 
instance quoted. There was, of course, a more 
highly speculative element in his form of oper- 
ating than in the other method, but the oper- 
ator was never either long or short more than 
10,000 bushels, and received about $6,000 a 
year or 60 cents per bushel from his privileges, 
in addition to the accruing of profit or the cur- 
tailing of loss by his mechanical method. 

In the accounts examined the persistent pur- 
chasers of privileges all finally lost money, ex- 
cept in a few cases where lines acquired on 
"puts or calls" were carried to a successful 
conclusion in the course of time. That is, a 
purchaser of "calls," finding a profit in his 
privilege, would call the wheat and keep it. 
This, however, resolved the matter into pure 



PUTS AND CALLS 97 

speculation, as the maximum benefits derived 
from this form of trading can only be correctly 
measured by the profit shown at the expiration 
of the "put" or "call." That is to say, the 
seller need suffer no greater loss than that** 
shown when the contract he has given matures, 
and consequently the profit to the buyer can- 
not be greater except through speculation. 

It would appear from these facts, that the 
purchasing of privileges is a poor business 
proposition, while the selling of privileges is a 
money making affair. This is true. We need 
only compare the kind of men who buy "puts 
and calls" and those who sell them to have this 
truth made apparent. The late Russell Sage 
was a persistent writer of these instruments 
and made a great deal of money by the pro- 
cess. The late Edward Partridge also made a 
good deal of money in this manner in the 
Chicago Wheat Market. He also used privi- 
leges to aid his manipulative campaigns. On 
several occasions, he sold "calls" heavily 
through the day, then suddenly bid wheat up 
just at the close of the market, effecting a 
closing just above the call price. The scat- 
tered purchasers would call the wheat and put 
Mr. Partridge short several millions at a high 
price, which was just what he wanted. He 
could not have sold as much wheat in the open 
market without breaking the price several 



98 THE CYCLES OF SPECULATION 

cents. On the same principle, he used some- 
times to sell a great many "puts" when he 
wished to cover a line of short wheat and rush 
the price downward at the close, thus enabling 
him to purchase a great line without disturbing 
the market by bidding for it. The process only 
worked a few times, however. As soon as it 
was discovered it failed, as the call price, when 
reached, met with such a wave of selling that 
it was impossible to break through it, and the 
manipulator was "hoist with his own petard." 
There is another drawback to the habit of 
buying privileges — a mental one. They are 
frequently made the basis of positive trading 
with disastrous results. The man who believes 
in an advance in certain shares or commodities, 
frequently purchases privileges instead of fol- 
lowing out his own convictions by actual trad- 
ing. Thus the man who had good reasons for 
expecting an advance in wheat at the time of 
the 20 cent advance mentioned above, and who 
used either "puts" or "calls" or both, as a 
means of operating on his opinions, would 
have reaped less than two cents a bushel during 
an advance of twenty cents. He might, of 
course, have called the wheat on the first day 
of the advance and remained long, but in that 
case he would merely have been speculating 
with equal chance of loss or profit in ensuing 
transactions. Aside from the initial two cent 



PUTS AND CALLS 99 

gain, he would have been in no different po- 
sition than if he had purchased and held the 
cereal on margin. 

It is the writer's opinion, founded on the ex- 
perience set forth above, that it is much better 
to effect transactions in the ordinary manner, 
than to depend on privileges. If "puts and 
calls" are dealt in at all, they should be sold, 
not purchased. The insurance companies make 
more money than is paid out in losses; so do 
the sellers of privileges. It may be well to add, 
however, that the man who runs an insurance 
company is in danger if he does not understand 
his business and his risks, or if he enters the 
field without sufficient capital to provide for 
possible initial losses. All this applies to the 
seller of privileges. 



VII 

The Question of Dividends 

It is a certainty that the short seller of divi- 
dend-paying stocks suffers a drawback from 
dividends, except in the rare cases where in- 
terest is allowed on short stocks. If we sell 
short a 6% stock at par and at the end of a 
year find the stock still selling at par, we have 
lost 6% without adverse market action. This 
onus cannot be escaped by short-time commit- 
ments; it is merely a matter of degree. The 
chronic short-seller is swimming constantly 
against the current. 

There is one point about dividends which is 
widely misunderstood by ordinary traders. It 
appears impossible to make a great many in- 
dividuals understand that short sales may be 
as intelligently made the day before a stock 
sells "ex-dividend" as at any other time. Even 
when good reasons for a decline exist, traders 
fight shy of "swallowing the dividend," or re- 
tire commitments just before dividend pay- 
ment for no other reason than that such dis-* 



101 



102 THE CYCLES OF SPECULATION 

tribution is to be made, which is, in fact, no 
reason at all. 

The disadvantage to the seller of stocks 
through the earning capacity or increment is 
the same on the day or the week preceding a 
disbursement as at any other time. The earn- 
ings of the company are a steady day to day 
affair, and are, as they accrue, constantly con- 
sidered in the price of the stock. In other 
words, the prices of listed shares are at all 
times "flat." At a point midway between two 
dividend days, the stock reflects in its current 
price half the amount of the undistributed divi- 
dend, or other increment. For example, if a 
certain stock sells normally at par and pays 6% 
per annum (3 per cent, in January and 3 per 
cent, in July) the price of the stock in March, 
eliminating speculative influences, would be 
101^ and in July 103. When on July 1st, the 
3 per cent, is distributed, the amount is simply 
taken away from the company and from the 
price of the stock also. It now returns to its 
normal price, 100, and whether it will go up or 
down from that point is a question for specu- 
lation. The factor which made the price 103 
has been eliminated and it remains for the cor- 
poration in question to again earn 3% available 
for distribution before the next dividend day. 

Perhaps this point may be made clearer by 
assuming that a certain stock is not handled 



THE QUESTION OF DIVIDENDS 103 

on the "fiat" basis, but is dealt in "and inter- 
est" after the method sometimes employed in 
bond transactions. Let us again eliminate 
speculation and take for example a stock sell- 
ing at 100 and paying 6%. Assuming that a 
dividend had been paid on this stock on Janu- 
ary 1st, the purchaser of the stock on February 
1st would pay 100 for his shares, and would 
also pay to the seller the accrued dividend for 
one month, or % of 1% which is exactly the 
same proposition as if the stock had been 
quoted flat on the Stock Exchange at 100^. 
On March 1st, the purchaser would pay 100 
for his shares and \°/o accrued dividend or 
101, etc. 

It appears, therefore, that the widespread 
idea that it is dangerous to sell a stock just 
before a dividend day is not sound. In fact, 
the whole matter may be dismissed by saying 
that if there was any good or logical reason for 
expecting a premature recovery of the price of 
dividend-paying shares, or an advance founded 
on any reason in connection with dividends 
other than the gradual accumulation from one 
date of disbursement to the next, the whole 
problem of making profits in Wall Street 
would be solved. The rule must necessarily 
work both ways, and if it is dangerous to sell 
at certain periods, it must be, in inverse ratio, 
safe to purchase. All we would need to do 



104 THE CYCLES OF SPECULATION 

therefore, would be to await the dates on 
which shares sold "ex-dividend" and make pur- 
chases. Here then, is exploited a patent way 
of getting the best of the market without study 
or effort. In truth, there is nothing whatever 
in the theory any more than there would be in 
buying Government bonds for a rise just after 
the interest had been paid on them. If good 
reasons exist for sales, they may be made as 
confidently at one time as another. The dis- 
advantage of being short of dividend-paying 
stocks is always present, and it cannot be es- 
caped, but the operation is a day to day affair 
not a matter of certain dates. 



Basing Railroad Values. 



"The problem of railway valuation is compara- 
tively simple, and beyond the reach of but few. A 
railway is primarily a carrier, a carter, a drayman. 
Obviously then, in considering an investment, we 
shall ask, What sort of a road has it? What sort 
of vans, and what sort of horses? What sort of 
trade? A teamster doing business on a fine level 
macadamized road, with big, heavy vans, and heavy 
draft horse, can work at a profit and underbid a 
carrier with old vans and poor horses, working on 
roads of heavy grade. So, for example, a railroad, 
other things being equal, with a water grade like 
the New York Central, has a tremendous advantage 
over an up and down grade like that of the Erie. 



THE QUESTION OF DIVIDENDS 105 

The Illinois Central can do business much more 
cheaply than the Missouri Pacific. A road with a 
magnificent equipment like the Lake Shore can un- 
dercut a poorly equipped road like the Nickel Plate. 
"The initial facts that we wish to know of a rail- 
way then are, What sort of a road has it, what is 
its traffic, does it get good rates? When we know 
what business it does, what its earnings are, then 
we shall ask, how is it capitalized, what are the fixed 
charges these earnings have to bear, what is there 
left, and what is the amount of stock which has to 
share the surplus? We shall ask if its earnings are 
stable, if the maintenance is adequate, if the policy 
of the road is conservative, if its management is 
good or bad. When we have done all this, then we 
shall go into the market, ask the prevalent rate of 
money, and by a simple rule of thumb, we shall 
know, in a broad way, whether the stock is cheap or 
dear." — From "American Railways as Investments," 
by Carl Snyder. 



The Effects of Business Depression on Rails and 
Industrials. 



"There is apparently a popular belief that the 
general market always moves together in a consid- 
erable swing, and that any advance in one set of 
stocks would be accompanied by a corresponding 
advance in others. So far as the general tone of a 
day's market is concerned this is true; but, never- 
theless, individual stocks or groups of stocks can 
easily and gradually change their selling basis in a 
brief period of time. In 1901, for example, the in- 
dustrial stocks reached their high levels, and suf- 



106 THE CYCLES OF SPECULATION 

fered a considerable decline in 1902. Meanwhile the 
rails were advancing. To illustrate and confirm this 
statement the highest prices of both Rails and In- 
dustrials in July, 1907, and July, 1902, are set forth 
in the following tables. There can be no unfairness 
in choosing this particular period. What is to be 
demonstrated is that it is possible for the groups to 
cross each other in price in a given time. The ten 
most active stocks have been chosen in each group 
as fairly representative of the entire market: 

RAILROAD STOCKS. 

High in High in 

Stock July, 1 901 July, 1902 

Atchison 8of 95I 

B. & O. . io8| 112I 

Can. Pac 108 J 139I 

St. Paul 177} 189I 

Erie 43I 39J 

L. & N in 145J 

Mo. Pac 121 J U9i 

Penna 151 § 161 § 

Reading 47 69! 

Union Pacific noj nof 

Average price 102.97 1 18.41 

INDUSTRIAL STOCKS. 

High in High in 
Stock July, 1901 July, 1902 

Amalgamated 124J 68| 

American Smelting 58 47I 

American Sugar 145I 134J 

Anaconda 4§| 27 

Col. Fuel & Iron 116J 102} 

National Lead 23 22 J 

Tenn. Coal & Iron 72^ 69J 

Rubber 21J 17 

U. S. Steel 48J 41 

U. S. Steel, Pfd 99l 92i 

Average price 75.8o 62.18 



THE QUESTION OF DIVIDENDS 107 

"These tables show that during the fiscal year 
used, railroad stocks advanced an average of over 
15 points, while industrials declined almost 14 points. 
In other words, the spread was 29 points. The man 
who bought rails and sold industrials would have 
made on the average 29 points. This exhibit entirely 
overthrows any argument that the market moves 
one way or the other homogeneously. 

"There was a reason for the spread illustrated 
above. There always is a reason. We had big crops 
in 1902, which helped the railroads. The industrials, 
on the other hand, were busily discounting the busi- 
ness depression of 1903. 

"Precedent shows that in a period of general de- 
pression Industrial stocks suffer about 33% more 
than rails. That is to say, in the high and low prices 
covering a long period, industrial securities should 
show a distinctly greater pro-rata of decline. Let 
me illustrate, using the stocks employed in the 
former table and covering the period of our last 
great cycle, 1901-02-03. As most of the high prices 
in rails were made in 1902, the highest prices of 
both 1901 and 1902 will be used, and the lowest of 
1903: 

RAILROAD STOCKS 

High in Low in 
1901-1902 1903 

Atchison 9 6 f 54 

B. & O n8£ 7if 

Can. Pac 145J 115I 

St. Paul 198I 133I 

Erie 45i 23 

L. & N i59i 95 

Mo. Pac 1254 85} 

Penna: 170 nof 

Reading 78$ 37I 

Union Pac 133 65} 

Average price 127.11 79.22 



108 THE CYCLES OF SPECULATION 

INDUSTRIAL STOCKS. 

High in Low in 

1901-1902 1903 

Amalgamated 130 33I 

Am. Smelter 69 36I 

Am. Sugar 153 107I 

Anaconda 54£ 25J 

Col. F. & 1 136I 24 

Nat'l Lead 32 io§ 

Tenn. Coal & 1 76f 25 } 

U. S. Rubber 34 7 

U. S. Steel 55 10 

U. S. Steel, Pfd 101J 49! 



Average price 84.22 33.01 

"It will be observed from the above table that In- 
dustrials declined about 51 points while rails de- 
clined about 48 points. But the decline cannot be 
figured in points. The higher range of railroad 
shares must be considered. A decline of two points 
in a stock selling at 100 is only equivalent to a de- 
cline of one point in a stock selling at 50. There- 
fore, in order to get a correct view of the matter, 
we must reduce the decline to percentages. On this 
basis, railroad stocks lost about 38% of their value, 
and industrial stocks lost about 60% of their value." 
— From Thomas Gibson's Market Letter, May 4th, 
1907. 

Undigested Securities. 

"The new methods and the new projects are going 
through the test of fire today, and some of them are 
being consumed. The tests which weeded out the 
badly organized and incompetent of the early stock 
companies, which drove to the wall the "wildcat" 
banks of ante-bellum days, and which wiped out 
dividends and stock rights in badly managed rail- 



THE VALUE OF RIGHTS 109 

ways, are now being applied to the new forms of 
organization which have been the growth of the past 
decade. But the stronger and better organized of 
these new corporations are likely to meet these 
trials without disaster, or to modify their methods 
to conform to the teachings of experience, until 
there remains to the financial world a valuable re- 
siduum of new methods for giving flexibility to capi- 
tal and promoting its transfer promptly and effi- 
ciently from the industries where it is not needed to 
those where it will render its highest service." — 
From "Wall Street and the Country," by Chas. A. 
Conant. 

How to Compute the Value of Rights. 

"Inasmuch as the method of computing the value 
of rights is slightly complicated, an illustration may 
be given. Let us take the instance of St. Paul again, 
where the stockholders were allowed to subscribe 
to 23% of their holdings to new stock at par. The 
common stock was at that time selling a little below 
$200 per share. Let us take the round figure, and 
the operation is as follows: 

One hundred shares at $200 per share equals. $20,000 
Twenty-three shares at $100 equals 2,300 



Total cost of 123 shares $23,300 

"Average cost, $181 per share. 

"Deducting $181 from the market quotation leaves 
$19, the value of the rights on each share of St. Paul 
stock. As a matter of fact, the selling price was a 
little below $200, and the highest price of the rights 
fell a little below $19 per share. 

"In other words the process is simply to take the 
number of new shares per hundred shares of the 



110 THE CYCLES OF SPECULATION 

original holding to be subscribed for, and add the 
value of these new shares at the subscription price 
to the cost of one hundred shares at the market 
price; then divide the total cost of both old and new 
shares by the total number of shares, and deduct the 
average price from the market quotations. This 
gives the selling value of the rights. ,, — From "Amer- 
ican Railways as Investments/' by Carl Snyder. 



Barometer of Averages. 

"In order to facilitate the examination of proper- 
ties and their comparative condition, the following 
table has been prepared. The figures were arrived 
at by averaging the operating expenses, fixed 
charges, margin of safety, and dividends of principal 
properties for the last fiscal year. The stock prices 
are based upon the closing figures of June 6, 1907. 
The margin of safety shown, is the margin over 
common dividends. Results were as follows: 

Average operating expenses . 69.01 % 

Average fixed charges 54-7o% 

Average margin of safety 5-28% 

Average dividend common 6.03 % 

Average price of stock i.ogf 

"As in all computations of this kind the figures 
are comparative and not basic. The fact that one 
stock is in a much better position than others does 
not necessarily mark that stock as a purchase, for 
all stocks may be too high, and underlying condi- 
tions may not warrant purchases in any quarter. 
Again, we must always consider the fact that im- 
portant elements which cannot be tabulated in fig- 
ures may be present. However, the table possesses 
value as a rough barometer, and after it has been 



BAROMETER OF AVERAGES 111 

broadly applied, specific influences may be given 
due consideration. If, for example, we find a com- 
mon stock selling well "below 109^, with operating 
expenses below 69.01; fixed charges below 54.70; 
margin of safety above 5.28 and the dividend rate 
above 6%, we have a remarkable combination of 
facts favoring the shares and investigation will be 
stimulated. The figures vary widely at times in 
different corporations and cannot always be con- 
sidered either bullish or bearish ,as the good or bad 
features may be already discounted in the current 
price of the shares. It may also be found that one 
property is going backward gradually while another 
is improving its position. — From Thomas Gibson's 
Market Letter, June 8th, 1907. 

The Best Method of Trading. 

"It may appear that if the market is to sway back 
and forth, sales on advances, and purchases on de- 
clines would offer the maximum of opportunity to 
the shrewd trader. But not so. To illustrate this, 
a market movement from high to low prices as 
shown by a chart is presented on the following page. 

"As simple as this illustration may appear, it is 
worthy of most earnest consideration. True, the 
upward and downward movements show opportuni- 
ties on both sides, but if the purchaser makes a mis- 
take, as all speculators will, he is hopelessly in- 
volved. If he buys at the wrong point he will never 
see daylight during the progress of the movement. 
Look at the other side of the matter. The seller 
cannot make a mistake. No matter at what point he 
sells a profit lies before him. A little reflection will 



112 THE CYCLES OF SPECULATION 
HIGH * 




LOWJ 

show what a tremendous difference exists here."— 
From Thomas Gibson's Market Letter, Feb. 2nd, 
1907. 

Indications of Crises. 

"Preceding Indications. — This preceding period is 
characterized by well-defined indications, some of 
which develop contemporaneously, but which, so far 
as they are distinct in time, occur in approximately 
the following order: 

"1 — An increase in prices, first, of special commod- 
ities, then, in a less degree, of commodities gener- 
ally, and later of real estate, both improved and un- 
improved. 

"2 — Increased activity of established enterprises, 
and the formation of many new ones, especially 
those which provide for increased production or im- 
proved methods, such as factories and furnaces, rail- 



INDICATIONS OF CRISES 



113 



ways and ships, all requiring the change of circulat- 
ing to fixed capital. 

"3 — An active demand for loans at slightly higher 
rates of interest. 

"4 — The general employment of labor at increas- 
ing or well-sustained wages. 

"5 — Increasing extravagance in private and public 
expenditure. 

"6 — The development of a mania for speculation, 
attended by dishonest methods in business and the 
gullibility of many investors. 

"7— Lastly, a great expansion of discounts and 
loans, and a resulting rise in the rate of interest; also 
a material increase in wages, attended by frequent 
strikes and by difficulty in obtaining a sufficient 
number of laborers to meet the demand." — From 
"Crises and Depression," by Theodore Burton. 



The Ordinary Swing of Prices During a Cycle of 





Speculation. 


UPWARD SWING. 


EXTREME 


A long period of backing 


HIGHEST. 


and filling; public buying, and 


100 


inside liquidation. 


90 


Excitement and inflation 




75% of general buying done 




here. 


80 


Good buying all around. 




Public interested. 


NORMAL 


Opinions mixed. Public be- 


VALUE. 


ginning to buy, but profes- 


65 


sionals rather bearish. 


45 


Insiders still bidding prices 




up. Professionals bearish. 


30 


Insiders bidding for stocks, 




public skeptical. 


20 


A dull market. Insid- 


EXTREME 


e r s accept all offer- 


LOWEST. 


ings. 



114 THE CYCLES OF SPECULATION 



DOWNWARD SWING. 



EXTREME 
HIGHEST. 
100 
90 



80 

NORMAL 

VALUE 

65 
45 



30 

20 
EXTREME 
LOWEST. 

— From Thomas 
1907. 



A long period of backing 
and filling; public getting 
tired and insiders selling. 

Insiders selling. Much bull 
talk, dividend increases, etc. 
Some averaging by people 
who loaded up at the top. 

More bull talk. More aver- 
aging. Insiders still selling. 

Many weak accounts forced 
out A temporary halt and 
probably a big rally. 

Insiders pretty well out. 
The wise speculative element 
consider this the bottom and 
load up. 

General blueness and pes- 
simism. 

A dull market. Insid- 
e r s accept all offer- 
ings 

Gibson's Market Letter, May 11th, 



The Factor of Safety. 



"There remains but one point to which, in view 
of the conditions roughly sketched above, the writer 
would call especial attention. That is, that the in- 
vestor should look well, always, to the factor of 
safety. Before he puts his money into any road, 
no matter if it be on the recommendation of the 
greatest banker in the United States, let him con- 
sider how far that company is prepared to weather 
a storm. Few roads ever prospered under receiver- 
ship, no matter how honest or how able. The re- 
ceivership itself is a handicap. No matter how high 
the yield, no investor whose primary regard should 



THE FACTOR OF SAFETY 



115 



be the safety of his money will put it into a road 
whose fixed charges, after ample charges for main- 
tenance, consume much more than 50% of the total 
net income available for interest, dividends and im- 
provements — that is, save in exceptional cases like 
the New York Central — and until he has satisfied 
himself thoroughly that the property is sound. 

"For the convenience of those not well acquainted, 
the following list of the principal roads is given, 
with the percentage of total net income consumed 
by fixed charges in the highly prosperous fiscal year 
of 1905: 

TABLE OF FIXED CHARGES. 



Atch., Top. & S. Fe. 
Atlantic Coast Line. 
Baltimore & Ohio. . . 
Boston & Maine .... 
Canadian Pacific. . . . 
Central of Georgia. . . 
Cen. R. R. of N. J. . 
Chesapeake & Ohio. 
Chicago & Alton. . . . 
Del., Lack. & West. 
Denver & Rio Grande 
Det., Tol. & Ironton 
Du.,S. S. & Atlantic. i 

Erie 

Gr. Rap. & Indiana . . 

Grand Trunk 

Great Northern 

Hocking Valley. . . . 

Illinois Central 

Iowa Central 

Kansas City South'n. 
L. Erie & Western . . . 

Lehigh Valley 

Long Island i 

L. S. & M. S 

Louis. & Nash. . . 
Maine Central. . . 
Michigan Central 



42% 
57% 
39% 
73% 
33%) 
47% 
5o% 
53% 
73% 
33% 
52% 



66% 
76% 
65% 
26% 

3i% 
47% 
79% 
54% 
69% 
46% 
01% 
38% 
54% 
46% 
57% 



Chi. & East. Illinois. 68% 

Chi. & N'western 39% 

Chi., Bur. & Quincy.45% 
Chicago Gt. Western. 67% 
Chi., Mil. & St. Paul. 32% 
C., St. P.,M. & O 42% 

a, a, c. & st. Louis. 69% 

Col. & Southern 55% 

Delaware & Hudson. 40% 
N. Y., Chi. & St. L..4i% 
N. Y., N. H. & H.... 4 8% 
N. Y., O. & Western. 53% 
Norfolk & Western.. 37% 

Northern Central 28% 

Northern Pacific 29 % 

Pennsylvania 38% 

Pitts. & Lake Erie. . .11% 
P., C, C. & St. L....54% 

Reading 45% 

Rock Island 83% 

Rutland 69% 

St. L. & S. Fran 82% 

St. L. & S'western. .76% 
Seaboard Air Line. . .78% 

Sou. Pacific 49% 

Southern .^69% 

Texas & Pacific 40% 

Tol., St. L.& S'w'n. .61% 



116 THE CYCLES OF SPECULATION 

Minn. & St. Louis. . .77% Union Pacific 31% 

M., St. P. & S. S. M. .44% Vandalia 54% 

M., K. & T 75% Wabash 80% 

Missouri Pacific 60% Wheel. & Lake Erie .90% 

N. Y. C. & H. R 64% Wisconsin Central. . .69% 



Importance of Fixed Charges to the Investor. 

"The high degree of stability imparted to interest 
payments and dividends by a low percentage of 
fixed charges, and the high degree of instability 
imparted by a large percentage, is so elementary 
that it would seem to need no emphasis. And yet 
this item is habitually disregarded by perhaps 90% 
of bond and stock buyers. On this account it may 
be worth while to illustrate by simple comparison 
the effect of a 20% decline in gross or net earnings. 
We will compare the conditions of two roads whose 
fixed charges are respectively 75% and 25% of the 
total net income. The operation would be as fol- 
lows: 

Suppose a 20% Decline 

Say Earnings $1,000,000 $800,000 

Exp. (70%). . . . 700,000 560,000 

Net $300,000 $240,000 

If F. C. 75%= 225,000 225,000 

Surplus for div $75,000 $15,000 (Case I) 

Decrease 80% 

If F. C. 25%= 75,ooo 75,ooo 

Surplus $225,000 $165,000 

Decrease 26% (Case II) 

"It will be seen from the above that a 20% de- 
cline in the net earnings would, in the first instance, 
mean a decrease of 80% in the surplus; while in the 
second case, the same decline would mean a de- 



IMPORTANCE OF FIXED CHARGES 117 

crease of only 26% in the surplus — figures which 
sufficiently indicate what a high percentage of fixed 
charges means. 

"In this connection it may be further noted that 
in the large holding companies, like the Pennsyl- 
vania, the New York Central, the Union Pacific, and 
others, the factor of safety and the surplus shown 
tends to be relatively more stable than in compa- 
nies largely or exclusively dependent upon the earn- 
ings of their own roads. This is due to the general 
custom of American Railways of paying out in divi- 
dends only a part of the actual surplus earned. 
From this it results that dividends are much more 
stable than earnings, and that the income of the 
holding companies from this source will corres- 
pondingly show smaller fluctuations than earnings. 
When, therefore, as in the case of some of the large 
holding companies named, the income from invest- 
ments represents a considerable portion of the total 
net income shown, the surplus, other things being 
equal, will be much more stable than in other com- 
panies. 

"It is needless to add that this stability is still 
further heightened when, as in the case of the Penn- 
sylvania, Union Pacific and some other roads, the 
percentage of fixed charges is at the same time low." 
— From "American Railways as Investments," by 
Carl Snyder. 

Borrowing and Lending Stocks. 



"When a speculator sells stock which he does not 
possess (when he sells it short) he (or what is the 
same thing, the broker who acts for him) has to 
borrow the stock to make delivery to the purchaser. 
The one who possesses stock (who is long of it) 



118 THE CYCLES OF SPECULATION 

is, in ordinary circumstances, as anxious to lend it 
as the one who has sold it short is anxious to bor- 
row it. 

"The lender of stock receives from the borrower 
the market value of it in money, but except when 
the stock is lending flat (without interest) or at a 
premium, the lender of the stock pays to the bor- 
rower of it interest on the money paid for the stock 
by the borrower. The rate of interest is determined 
by bid and offer. 

"On the New York Stock Exchange, brokers who 
have stocks to borrow and brokers who have stocks 
to lend assemble immediately after the close of busi- 
ness on the exchange and those who needs stocks 
borrow amounts necessary to make deliveries the 
next day. Those who neglect to borrow at this 
time must do so the next morning, or some time in 
the day before the delivery hour, 2.15 p. m. There 
is no loan crowd in the morning, but borrowers 
seek lenders at the posts on the floor of the ex- 
change around which the particular stocks that they 
require are dealt in. 

"The same rules govern the receipt and delivery 
of stocks borrowed and loaned as govern stocks 
bought and sold. In returning borrowed stock the 
borrower must notify the lender before 1 o'clock on 
the day of delivery; the lender in calling or demand- 
ing the return of stock must do likewise. 

"When a stock is loaned flat, the owner is re- 
lieved from the cost of carrying the stock. If 
loaned at a premium he is still better off, for the 
premium is so much gain. When a stock is loaned 
at a premium, the premium applies in the absence 
of a renewal of the loan only to the day on which 
the stock is loaned. 

"If a stock that has been borrowed advances in 



BORROWING STOCKS 119 

market price the lender may require the borrower 
to pay to him the difference between the price at 
which the stock was loaned and the new higher 
price. On the other hand, if the stock declines in 
price the borrower may require the lender of the 
stock to return to him the difference between the 
price at which the stock was borrowed and the new 
lower price. These differences are called market 
differences. 

"When a corner is being worked up in a stock it 
is the practice of those engineering it freely to loan 
the stock in order to encourage the creation of a 
short interest in it. When this short interest has 
become large enough, or in other words, when the 
stock has become sufficiently oversold, a demand for 
the return of the stock brings the corner to a cul- 
mination. 

"An apparent borrowing demand for stocks is 
sometimes created by the efforts of money lenders 
to obtain higher interest on their money than is ob- 
tainable in lending it in the money market. If the 
lending rate for a particular stock is, say, 6 per cent, 
when money is lending at 4J/2 per cent, in the money 
market the money lenders will borrow the stock in 
order to obtain the extra interest. 

"When a seller of long stock (stock actually 
owned) desires to create the impression that he is 
selling short stock (stock not owned or possessed) 
he has his broker borrow stock for delivery to pur- 
chasers. Then when he has completed his sales he 
delivers his own stock to the onto from whom his 
broker borrowed. 

"Also, when a seller of stock desires to conceal 
his identity, he has his stock transferred or made out 
in the name of his broker, or a clerk, or some other 
person previous to its delivery to purchasers. 



120 THE CYCLES OF SPECULATION 

"Arbitrage dealers often sell stock held abroad 
which will not be received for some time. They 
borrow for delivery to purchasers and when their 
own stock arrives they make returns to the ones 
from whom they borrowed. 

"Corporations intending to issue new stock have 
been known to sell the stock in advance of its is- 
suance and to borrow to make delivery to pur- 
chasers. Then when the new stock was issued it 
was used to make return to the ones from whom 
stock had ben borrowed." — From Smith's Financial 
Distionary, by Howard Irving Smith. 

Scalping. 

"There are many different methods and degrees 
of scalping. The word is supposed to express all 
the forms of trading between the "Chaser of eighths" 
and the man who operates for a profit of several 
points. 

"Scalping operations are more common than any 
other form of trading. There are several reasons 
for this. Many people consider the market a ma- 
chine, and base operations on pictures of the past, 
i. e., charts. These misused and mischievous instru- 
ments show so many opportunities of profit in move- 
ments both ways, that the unsophisticated trader 
sees what was possible, while the probable is over- 
looked. 

"Again, the desire to scalp is helped by impatience 
and greed. The small trader will grow disgusted 
if there is the slightest delay. Dullness is unbear- 
able to him. Also, he will frequently close good 
commitments merely for the sake of 'seeing the 
money/ I have seen many traders 'clean up,' receive 
a check which was of absolutely no present use to 



SCALPING 121 

them, gloat over it for a while, and pay another 
commission to replace the trades. Ridiculous, but 
true. 

"I may say, as a general principle, that I consider 
scalping the poorest form of trading. It involves 
the continued multiplication of commissions, and 
constant personal attention. I know of but two men 
who have made any considerable amount of money 
by scalping methods. They are exceptionally fitted 
for this form of trading, and have the ability to take 
a small loss quickly. This is a trait which is very 
rare among public traders. A man will usually ac- 
cept a small profit for no other reason than that it 
is a profit, and will sit stubbornly on a loss for no 
other reason than that it is a loss. 

"The man who has reason to believe that a stock 
will advance or decline ten points, will, in nine cases 
out of ten, realize more profit by merely making his 
trade in the stock and going about his business 
until he considers it wise to terminate the contract. 
I will say decidedly that more traders will do bet- 
ter, make more money, and suffer less loss of time, 
and less annoyance by abandoning scalping tactics 
altogether. 

"This view will no doubt cause my friends in the 
brokerage business much wrath and indignation. 
They naturally prefer to have ten commissions 
rather than one, and I fear that in many cases they 
recommend scalping tactics for no better reason 
than the one mentioned. 

"That constant and repeated operations are disas- 
trous, is pretty well shown by the remark of a suc- 
cessful 'Bucket Shop' man: 'I don't care what they 
do, or what the market does, if I can only keep them 
coming up to the order windows every few hours/ 



122 THE CYCLES OF SPECULATION 

said this gentleman. And he was right; for the or- 
dinary scalper is no more than a gambler, basing 
his operations on possible variations, and paying 
a great percentage. 

"But if one will insist on scalping, it may be well 
to examine the subject from the other side and see 
how the least of the evils may be chosen. Without 
recommending the practice, or qualifying the views 
expressed above, I will therefore give my idea of the 
safest methods of scalping. 

"The man who attempts to operate on both sides 
of the market during the same period, is the most 
deluded individual in the speculative world. I have 
already stated, that I have only seen two traders 
out of thousands I have observed, who could do 
this with any degree of success. These hybrid Bull- 
bears are certainly not working on any definitely 
formed opinion of the future. They are worse off 
than even the traders who are unchangeably and 
constitutionally wedded to one side of the market 
the year round. These latter prejudiced and inflexi- 
ble individuals will occasionally have a turn in their 
direction, whatever their position may be, but the 
Bull-bear will go from one month to another, never 
seeing anything more than a temporary gain. 

"It is important, therefore, that the active trader 
should form his ideas, base his views on something, 
and, if he wishes to entertain himself with repeated 
operations, map out a plan of campaign which shall 
be, at least, intelligent in its original conception. 

"Just how successfully the plan suggested will re- 
sult, depends largely upon the alertness and under- 
standing of the individual who engineers it. If the 
active participant is easily moved from his position 
by changes of a point or two against him; if he is 



SCALPING 123 

easily frightened by wild rumors and inspired talk; 
if he expects to gain thousands in a few days by ven- 
turing hundreds; or if he believes that he can operate 
in stocks so shrewdly as to guess high or low points 
within a dollar or two a share, he will meet with dis- 
appointment and loss. If he can overcome these 
drawbacks, he may do very well as an active 
trader, but I wish to reiterate my views that the 
man who takes a position on the market and retains 
it, will make more money than the scalper. 

"As a test question, let me put this inquiry to the 
active traders who read this letter: 

"When you have been correct on a certain move- 
ment of say ten points, and have made repeated 
operations, did you make any more money, or as 
much, as you would have realized on a single trade 
showing a ten point profit ?" — From Thomas Gib- 
son's Market Letter, February 14th, 1907. 

Crop Damage. 

As to the crops, we find many over-optimistic 
people trying to belittle positive crop damage. It 
cannot be belittled. It is dangerous and foolish to 
evade an issue instead of facing it. The argument 
that our surplus from last year will carry us through 
a shortage is puerile. That surplus has already been 
considered. Wheat in the bin is money; some of 
that money has already been spent and all of it has 
been given due consideration in the basing of our 
wealth. A number of writers attempt to make a 
probable crop of 2,500,000,000 bushels of corn a 
"bumper crop." Their methods of arriving at this 
conclusion are not sound. It is certain that we 
should, in the natural course of events, raise more 
and more wheat and corn each year as the popula- 



124 THE CYCLES OF SPECULATION 

tion of the world, and the uses of the cereals in- 
crease. To compare one year with another will not 
do. Particularly in Corn and Cotton must we stead- 
ily increase in acreage and production, for we supply 
the world with those commodities. To illustrate this 
point, let us go back a few years and see what has 
occurred. 

COTTON AND CORN PRODUCTION OF THE UNITED 
STATES FOR TWENTY-FIVE YEARS. 

Bushels Bales 

Year Corn Cotton 

1880 1,717,434,543 5,789,329 

1885 1,936,176,000 6,550,215 

1890 1,568,874,000 8,655,000 

1895 2,151,139,000 7,157,340 

1900 2,105,102,516 10,383,422 

1905 2,707,993,542 11,345,988 

1906 2,927,416,091 13,000,000 

The time is very near at hand, when anything 
less than 3,000,000,000 bushels of corn will be a crop 
failure; and high prices cannot be considered a great 
compensation in lean years. . Short crops mean de- 
creased demand for labor and loss of purchasing 
power by the common people, who are after all the 
best spenders. — From Thomas Gibson's Market Let- 
ter, July 13th, 1907. 



The Selection of Securities. 

When so many seductive baits are offered, so 
many nets and traps contrived and constructed by 
clever brains and cunning fingers are spread for the 
capture of those having money, is it surprising that 
the careless and credulous are victimized, and even 
that the sagacious and prudent should sometimes 
be taken in? Nevertheless, for the losses they have 
sustained, investors, as a rule, have themselves 



THE SELECTION OF SECURITIES 125 

chiefly to blame. The mistakes made, in nine cases 
out of ten, have been the purchase of "cheap" securi- 
ties. The hope of realizing a little more than ordi- 
nary interest, by buying paper at a discount, has 
proved to be the rock on which unnumbered capi- 
talists have split. In addition to their money's 
worth, they have endeavored to get something for 
nothing, with the result of most generally getting 
nothing for something. It is remarkable how blind 
are people, ordinarily sagacious enough to make 
money, to the fact that property cannot pay a reve- 
nue beyond its producing capacity. For instance, 
how can a trolley company, whose line is wholly or 
mainly built from the proceeds of mortgage bonds, 
sell them at a heavy discount, besides allowing large 
commissions for the selling, and then pay both this 
interest and dividends on a large issue of watered 
stocks? Or how can a poor agriculturist, occupy- 
ing a half improved farm out on the frontier, with 
a family to support and grain selling barely above 
the cost of production, pay ten or twelve per cent, 
upon the capital with which he does business? — 
From "The Art of Wall Street Investing," by John 

Moody. 

The Bank Statement. 



"A statement or exhibit of the condition of 
banks. 

"In New York the Bank Statement is issued 
from the clearing house on Saturday. The consoli- 
dated statement (or as it is officially designated, the 
"summary of the weekly statement of the associated 
banks") is the collective showing by the banks be- 
longing to the clearing house — the showing when 
the returns of the individual banks have been con- 
solidated (put together). 



126 THE CYCLES OF SPECULATION 

"The consolidated bank statement shows the aver- 
age deposits, loans, specie, legal tenders, circulation, 
reserve and surplus reserve of the banks for the 
week ending with and including Friday. 

"The term deposits includes the net deposits 
(credit balances) of persons and concerns (desig- 
nated as individual deposits), balances to the credit 
of other banks and all money and credits subject to 
withdrawal. Loans include money loaned and like- 
wise paper (promissory notes, drafts, etc.) bought. 
Specie includes not only gold and silver coins, but 
also gold certificates, which are redeemable in gold 
or silver, as the case may be. Legal tenders as the 
term is used in the bank statement, means, United 
States notes (greenbacks) and Treasury notes (notes 
issued for silver bullion purchased under the so- 
called Sherman act). 

"Note. — As defined by the statutes, legal tenders 
include United States notes, Treasury notes, gold 
and silver coins and minor coins, but not gold certifi- 
cates, nor silver certificates, 

"Circulation means the notes issued by national 
banks, to secure the redemption of which Govern- 
ment bonds have to be purchased by the banks and 
deposited with the Treasurer of the United States. 
A bank cannot count circulation in its reserve; 
whether it is its own circulation or the circulation 
of some other bank, makes no difference. Reserve 
means the total amount of specie and legal tenders 
held. Surplus reserve means the total amount held 
in excess of legal requirement. A national bank 
(in New York City) must, by law, maintain a re- 
serve equal to 25 per cent, of its deposits; a state 
bank must, by law, maintain a reserve of 15 per cent. 
In compiling the bank statement a reserve of 25 per 



THE BANK STATEMENT 127 

cent, is allowed or figured for state banks as well 
as for national banks. 

"The consolidated statement formerly was issued 
from the clearing house in the following form, the 
changes (increases and decreases) resulting from 
comparison with the preceding statement (the state- 
ment issued the week before) : 

Loans $874,647,900 $2,344,000 Increase 

Specie 152,338,200 1,068,300 Increase 

Legal Tenders. . . . 67,274,300 1,319,000 Decrease 

Deposits 872,340,600 164,600 Increase 

Circulation 36,072,500 411,600 Increase 

Decrease of reserve, $2<_ 1,850 

"The (final) item reserve in the statement as 
issued from the clearing house, meant surplus re- 
serve, although not specifically so stated. J 

"In the newspapers the statement appeared as 
follows; being elucidated so as to show the reserve 
held (that is, specie and legal tenders which are 
generally referred to as cash holdings), the reserve 
required and the surplus reserve with the changes in 
these items: 

Current Preceding 

Week Week Changes 

Loans $874,647,900 $872,303,700 In. $2,344,200 

Deposits. . . . 872,340,600 872,176,000 In. 164,600 

Circulation.. 36,072,500 35,660,900 In. 411,400 

Legal Tends. 67,274,300 68,593,300 De. 1,319,000 

Specie 152,338,200 151,269,900 In. 1,068,300 

Reserve held $219,612,500 $219,863,20 4 De. $250,700 
Res. req'r'd. 218,085,150 218,044,000 In. 41,150 

Surplus... $1,527,350 $1,819,200 De. $201,850 

"In 1902 the Secretary of the Treasury (Leslie M. 

Shaw) suspended the requirement to keep a reserve 

against government funds on deposit in national 

banks upon the ground that these funds were special 



128 THE CYCLES OF SPECULATION 

deposits which were fully secured by pledge of 
bonds with the Treasurer of the United States. 
This action by the Secretary of the Treasury caused 
a change in the make-up of the bank statement by 
the addition to it of figures showing the average 
amount of government funds on deposit. The con- 
solidated statement was thereafter issued from the 
clearing house in the following form: 

Loans $874,647,900 $2,344,200 Increas e 

Specie 152,338,200 1,068,300 Increas e 

Legal Tenders. . . . 67,274,300 1,319,000 D'creas© 

^Deposits 872,340,600 164,600 Increase 

Circulation 36,072,500 411,600 Increase 

Reserve on all de- 
posits 291,850 D'crease 

Reserve on all de- 
posits other than 

United States. . . 325,825 D'crease 

*United States deposits included, $40,633,400. 

"In the newspapers the statement was made up in 
both the old and the new forms as follows: 

Current Preceding 
Week Week Changes 

Loans $874,674,900 $872,303,700 In. $2,344,200 

Deposits. . . . 872,340,600 872,176,000 In. 164,600 
Circulation.. 36,072,500 35,660,900 In. 411,400 
Legal Tends. 67,274,300 68,593,300 De. 1,319,000 
Specie 152,338,200 151,269,900 In. 1,068,300 

Reserve held $219,612,500 $219,863,200 De. $250,700 
Res. req'r'd. 218,085,150 218,044,000 In. 41,150 

Surplus $1,527,350 $1,819,200 De. $291,850 

Deducting the United States deposits held by 
the banks from the aggregate deposits the bank 
statement compares as follows: 



THE BANK STATEMENT 129 

Current Preceding 

Week Week Changes 

Tot. deposits $872,340,600 $872,176,000 In. $164,600 
U.S. deposits 40,633,400 40,769,300 De. i35,ooo 

Dep'S25%.. $831,707,200 $831,406,700 In. $300,500 
Reserve held 219,612,500 219,863,200 De. 250,700 
Res. req'rM. 207,926,800 207,851,675 In. 75,125 

Surplus $11,685,700 $12,011,525 De. $325,825 

"The detailed bank statement, which is issued 
simultaneously with the consolidated statement, con- 
tains first the number of each bank (each bank has 
a number by which it is known at the clearing 
house) and then the name of the bank, after which 
follow the amounts of its capital, net profits (surplus 
and undivided profits), specie, legal tenders, deposits 
and circulation. 

"The bank statement is said to have been made up 
on rising averages when the items in it have been 
increasing in amount during the week, or the state- 
ment is said to have been made up on falling aver- 
ages when the items in it have been decreasing in 
amount during the week. 

"Generally speaking, the bank statement is favor- 
able or good when it shows that the position of the 
banks has been strengthened, as by an increase in 
the surplus reserve through, or by means of an in- 
crease in their cash holdings rather than by a de- 
crease in their deposits, which often is effected by 
the calling of loans — by demanding and obtaining 
the payment of money loaned on call. As money 
loaned is credited to borrowers on their deposit 
accounts and increases the total deposits of the 
bank, so the payment of loans by borrowers takes 
from and decreases deposits. As will be seen, the 
calling and consequent payment of loans does not 



130 THE CYCLES OF SPECULATION 

increase cash holdings but merely changes balances 
in individual accounts. A reduction in deposits re- 
duces the amount of cash required to be held as a 
legal reserve and correspondingly expands (in- 
creases) the surplus reserve. Generally speaking, 
also, the bank statement is unfavorable or, if par- 
ticularly unfavorable, is bad when the position of 
the banks has been weakened, as by a decrease in 
the surplus reserve through a decrease in their cash 
holdings rather than by an increase in their depos- 
its, which often is effected by an expansion in (in- 
crease in amount of) their loans, which correspond- 
ingly expands (increases) their deposits and corres- 
pondingly increases the amount of cash required to 
be held as a legal reserve. This additional amount 
is deducted from and correspondingly reduces the 
surplus reserve. 

"The bank statement may be said to be favorable 
or good, however, if an increase in loans is reported 
when the banks are surfeited with money: also the 
bank statement may be said to be unfavorable or 
rather not good (but hardly bad) when it shows 
that money is accumulating in idleness in the banks 
— when deposits are increasing, not as a result of 
increasing loans, but in the absence of a borrowing 
demand for money. 

"There are other circumstances which make the 
bank statement favorable or unfavorable as disclosed 
in the circumstances themselves. 

"There is also a non-member bank statement, 
which is a statement of the conditions of banks 
which are not members of the clearing house but 
clear through members. This statement is issued 
from the clearing house on Monday and shows the 
average condition of the banks for the week ending 
with and including the preceding Friday. 



THE BANK STATEMENT 131 

"The non-member bank statement contains the 
name of each bank, followed by its capital, net 
profits, average* amount of loans and discounts and 
investments, average amount of specie, average 
amount of legal tender notes and (national) bank 
notes, average amount on deposit with its clearing 
house agent (the bank through which it clears at the 
clearing house), average amount on deposit with 
other New York City banks and trust companies, 
average amount of net deposits and average amount 
of circulation." — From Smith's Financial Dictionary. 



The Cycles of Stock Speculation.* 

All speculators, and most investors, possess 
a general idea of the range and trend of prices 
for a considerable period. This knowledge is 
more frequently based upon impressions 
gained during their own years of activity in 
the speculative world than upon research. 
The knowledge gained by active participation 
is certainly the most forcible and lasting, but is 
frequently productive of erroneous ideas, as 
will be set forth hereafter. 

For the purpose of giving a clear idea of the 
movements in stocks during recent years, tha 
accompanying chart has been arranged. The 
use of circles in lieu of the customary straight 
lines was hit upon as presenting more clearly 
to the eye the comparative extent of each year's 
movement, and more plainly distinguishing 
one year from another. These advantages are 
gained without obscuring from view the gen- 
eral trend of prices for the period considered. 

For the purpose of establishing a single 
hypothetical stock whose movements should 
be representati\ e of the course of all other ac- 



*Reprinted from Moody's Magazine of August 1906. 

133 



134 THE CYCLES OF SPECULATION 

tive securities, the fluctuations of twenty 
stocks were welded together. That is to say, 
the high points of these stocks for the year 
1896 were added and divided by 20. The same 
course was followed with the low points, and 
each year considered was treated in like man- 
ner. By drawing a circle upon a numbered 
chart with the upper rim resting upon the 
figures representing the high point, and the 
lower rim upon those representing the low 
point, an average price for the year is neces- 
sarily established at the axis. 

The size of the circles shows the actual and 
comparative extent of the movements, and the 
position of consecutive years on the diagram 
shows the general trend of prices. 

In selecting the twenty stocks to be used in 
forming a composite security, care was taken 
to eliminate the shares of such corporations as 
have undergone radical changes during the 
period considered, 1896 to 1905, inclusive. The 
Rock Island Company, for example, is in itself 
an important system, but owing to the con- 
version of $75,000,000 Common stock into 
$200,000,000 of mixed securities in 1902, the 
tracing of its subsequent movements would in- 
volve unnecessary computations and expla- 
nations. It may be added that experimental 
tests show that the hypothetical stock, call it 



RANGE OF "COMPOSITE COMMON" 135 

"Composite Common" for the sake of conveni- 
ent reference, was faithfully representative of 
almost all movements from 1896 to 1906, and 
that the selection of other stocks would have 
made only insignificant variations in the gen- 
eral result. The original intention was to ex- 
tend the investigation for a longer period than 
ten years, but so many readjustments, assess- 
ments, and other changes occurred in listed se- 
curities prior to 1896 as to make a clear show- 
ing difficult. 

Common stocks of railroads only were con- 
sidered. Few Industrials have reached their 
tenth birthday, and aside from this, their in- 
troduction would make a false showing by in- 
creasing the dividend rate with no correspond- 
ing increase in the selling price of the stock. 

The twenty stocks chosen for amalgamation 
were as follows: 

Atchison, Topeka & Santa Fe, Baltimore and 
Ohio, Canadian Pacific, Canada Southern, 
Chesapeake & Ohio, Chicago & Great Western, 
Chicago, Milwaukee & St. Paul, Chicago & 
Northwestern, Chicago, St. Paul, Minneapolis 
3b Omaha, Erie, Illinois Central, Louisville & 
Nashville, Missouri Pacific, New York Central 
& Hudson River RR., Pennsylvania, Reading, 
Southern Pacific, Southern Railway, Union 
Pacific, and Wabash RR. 



136 THE CYCLES OF SPECULATION 

PRICES OF COMPOSITE BY YEARS FROM 1896 TO 
1906, INCLUSIVE. 

Fluctua- 
Year High Average Low tion 

1896 44 37i 3i 13 

1897 53 i 43 i 34i i8f 

1898 62I 53^ 44 i8£ 

1899 7^1 64i 56 i6| 

1900 8o| 70 J 6of 20b 

1901 Io6 i 8 °5 73i 33} 

1902 H9i iosi 9if 27f 

1903 io6i 895 73 £ 33i 

1904 *°5i 9i 7^i 29 

1905 I22| 109! 96^ 26J 

1906 125I 111J 98^ 27f 

Fractions were necessarily omitted from the 
totals employed in charting the movements. 
They are, however, unimportant. Dividends 
on Composite Common were as follows: 

1896 if % 

1897 ij % 

1898 if % 

1899 Il 9 u% 

1900 2} % 

1901 3 % 

1902 3I % 

1903 3t % 

1904 3 A % 

1905 3i % 

1906 4| % 

It has been the frequent contention of the 
writer that a chart as a basis for speculative 
ventures is ridiculous, but a diagram framed 
for the purpose of pointing out certain facts, or 
inciting the student of speculative affairs to 
investigation of causes is a different matter. 
No interested person can look at the accom- 



RANGE OF "COMPOSITE COMMON" 137 

FLUCTUATIONS OF STOCKS FOR TEN YEARS. 
(The rims of the circles touch the average high and low points 
of 20 railroad stocks, each year for 10 years.) 




Reproduced, by permission, from Moody's Magazine of August, 
1906. 



138 THE CYCLES OF SPECULATION 

panying chart without being struck at once 
with the decline of 1903 following the steady 
advance of the preceding years. If this ob- 
servation incites intelligent investigations as to 
the reasons for the reversal, much good may 
result. On the other hand, the fallacy of oper- 
ating on mere mechanical records of the past 
is shown by the same diagram. If the chart 
had been handed to one of the mechanical 
traders in 1902 he would have argued that the 
average price of each year marked the approxi- 
mate low point of each succeeding year. It 
certainly does look convincing, but what fol- 
lows? The infallible system not only fails to 
work, but reverses itself, and the average price 
of 1902 becomes the approximate high price of 
1903 and 1904. At about the time the system 
player has gathered enough figures to go on, a 
change occurs. No intrinsic merit attaches to 
any kind of diagram, they being merely con- 
venient forms for tabulating history. 

Some interesting coincidences occur in the 
chart; most remarkable is the exactly similar 
sifce and position of the circles representing the 
years 1901 and 1903. In no instance did the 
high or low points of any integral stock cor- 
respond in these years, but the total footings 
were identical in each case. 

The speculator may extract some value from 
the diagram by observing that opportunities 



RANGE OF "COMPOSITE COMMON" 139 

for profits of forty or fifty points did not occur 
during the entire period. The extreme possi- 
bilities in any one year were 33 points, and 
much less on the average. If the trader had 
purchased or sold Composite at an average 
price, his possibilities of profit v/ould have been 
limited to about 15 points in any one year. 
This does not accord with accepted theories. 
The ordinary speculator who pursues his 
operations for ten or fifteen points successfully 
is almost certain to believe that much more 
profit lies before him, that he is only getting 
started. There is a reason for this; the public 
trader takes for his barometer some security 
which has been conspicuous for its extended 
fluctuations; he naturally notices and remem- 
bers it to the exclusion of the rank and file of 
stocks. For example, every active participant 
in speculative affairs knows that Copper had a 
range of 75 points in a single year, 1901. He 
bases possibilities too much on this sort of 
knowledge without reflecting that Copper was 
a cardinal exception, and that in order to par- 
ticipate in such movements he must throw 
caution to the winds, and deal in stocks which 
offer no degree of safety. 

Another point established is the lapse of 
time required in a readjustment of values. It 
took Composite Common seven years to ad- 
vance from an average price of 37 to an aver- 



140 THE CYCLES OF SPECULATION 

age price of 105, 68 points. This again falls 
short of the speculator's ideas. He expects to 
buy a stock at 50 today, and sell it at par six 
months hence, an operation which is shown 
by the movements of a representative stock 
to require a period of six years. Again his ex- 
pectations are founded on exceptions. The 
same line of reasoning applies to one case as 
to the other. The speculator unconsciously 
magnifies everything connected with specu- 
lation. 

In reviewing the movements of prices from 
1896 to 1905, the most important question is, 
what caused the reversal of form in 1903? A 
complete answer to this question would be 
highly educational. There was no panic, 
nothing faintly resembling one; business suf- 
fered some stagnation, it is true; there was a 
falling off in the iron and steel business, but 
crops were good, and wheat, corn, oats, and 
cotton brought good prices in both 1903 and 
1904. Serious business depression was more 
in anticipation than in realization, but 1904 
witnessed no material recovery in prices. 
These causes do not fully explain so radical a 
change. If conditions had been such as to 
cause a reduction of dividends, or a scarcity of 
money in 1903, the decline would be explained, 
but money was plentiful enough, and dividends 
were unchanged. The ratio of dividends as 



RANGE OF "COMPOSITE COMMON" 141 

compared with prices was also ' fairly main- 
tained from 1896 to 1902, and it would appear 
that prices should merely stop advancing when 
dividends became stationary ; but prices did not 
merely stand still, they went materially back- 
ward. 

Without pretending to enter into a full dis- 
cussion of the causes for the change, one or 
two points may assist in forming a conclusion. 
The steady advance in prices from 1896 to 
1902 represented two things — a recovery from 
the great depression of 1893, and the natural 
advances of property values in a prosperous 
and growing country. The latter point is the 
more important, and as there has been no ces- 
sation of the growth of population or pros- 
perity, other causes for the reversion must be 
sought. It is not sufficient to merely say that 
the recovery over-leaped itself, for such an 
event would have plainly mirrored itself in a 
reduction in the rate of dividend returns. 

Capitalization of railroads in 1903 increased 
about 14% as compared with an average in- 
crease of 6% in the preceding seven years. 
Add to this the tremendous increase in the 
capitalization of industrial corporations, and 
an over-supply of stocks appears as one of the 
contributary causes — undigested securities. 

Dividend rates were maintained, but were 
not increased. This particularly affects the 



142 THE CYCLES OF SPECULATION 

Simon pure speculator. Nothing will drive 
him into a panic quicker than a decreased divi- 
dend, and nothing makes him so sanguine of 
higher prices as an increase in the rate of pay- 
ment. He is always basing his operations on 
rumors of higher dividends, and when one of 
these rumors fails of verification, it is almost 
as bad as a decrease. 

And dividends did decrease in one important 
quarter; United States Steel, the speculative 
favorite, capitalized more heavily than a dozen 
ordinary corporations, cut its rate from 4 to 
3^4%, with every promise of a further re- 
duction. This had a far reaching effect, both 
on speculators and small investors. 

It is certain that fundamental conditions 
have more to do in shaping prices than has 
speculation, but the speculator helps, and in 
1903 he was particularly potent because of the 
excesses engendered by the unusual specula- 
tive advances of 1901 and 1902. He helped to 
make the prices and he helped to break them, 
so he may be considered a factor in the re- 
versal. 

The small investor helped. He, too, is a 
dividend man ; he seldom looks at earnings, im- 
provements, or extensions — he wants divi- 
dends. United States Steel was a body blow 
to him; it not only affected his purse, but it 
frightened him. 



RANGE OF "COMPOSITE COMMON" 143 

And it is probable that an army of small in- 
vestors sold their holdings for another reason 
- — they discovered that they could make a 
higher rate of income in other channels. So 
long as both dividends and prices advanced 
they were satisfied. They were speculating, 
not investing, but you cannot convince the 
ordinary man that buying a stock outright, in 
the hope of an advance in price, is speculation 
pure and simple. 

Much of the money diverted from the stock 
market in 1903 by the class last mentioned, has 
never returned to Wall Street. This bears 
out the theory that higher rates of interest are 
being found elsewhere. Never before has the 
public refused to enter the stock market dur- 
ing a period of great prosperity. They are 
absent now, and furthermore, they show no in- 
tention of returning. Possibly they are wrong. 
The same influences which are operating to 
give them better returns may be operating to 
greatly enhance the value of the shares they 
ignore, — but the small investors want divi- 
dends. Their failure to enter the stock market 
would seem to be strong evidence that they 
are finding other investment-speculations more 
attractive than listed shares. If this is the 
case, the influences leading to higher interest 
rates are already at work, although not clearly 



144 THE CYCLES OF SPECULATION 

discernible. Diversification of investments 
would tend to obscure the truth for a time. 

But whatever the causes for the stock 
market relapse of 1903 may have been, the re- 
covery has been complete. The average prices 
of 1906 were the highest on record. 



Cycles of Grain Speculation.* 

In examining the price movements of wheat 
and corn for the last ten years, a gradually ad- 
vancing trend is apparent. That such would 
be the case was a foregone conclusion; we 
naturally expect to find wheat and corn in the 
foremost ranks of a universal movement to- 
wards higher prices. The underlying causes 
for this general appreciation have already been 
extensively and clearly discussed in Moody's 
Magazine. 

All Prices Advancing. 

The price appreciation of wheat and corn is 
merely confirmatory of the theory that all 
prices are advancing, and that they will con- 
tinue to advance until the balance between 
gold and other commodities is readjusted. 

But there is something else written between 
the lines of the statistics of price changes in 
wheat and corn. The relative advance of the 
two cereals is all out of proportion. 

This fact leads us to seek for some specific 
cause operating either to depress one cereal or 

♦Reprinted from Moody's Magazine of May, 1906. 

145 



146 THE CYCLES OF SPECULATION 



enhance the other, irrespective of the influence 
already named. 

The figures for the last ten years are as fol- 
lows: 



Year 
1896. 
1897. 
1898. 
1899. 
1900. 
1901 . 
1902. 
1903. 
1904. 

1905. 
1906. 



WHEAT. 



High Average Low 

53 

64* 

62 

64 

6iJ 

63i 

67i 

7oi 

8ii 

771 

69* 



109 

185 
79 i 
87i 
79 J 
95 
93 

122 

124 



73tt 

86A 

I23§ 

7i I 
74i 
7iA 

8ii 
8if 

101H 

1 oof I 

81j 



CORN. 



Year 

1896. 

1897. 

1898. 

1899. 

1900. 

1901 . 

1902 . 

1903 
1904. 

1905. 
1906. 



High 

3of 

32J 

38 

38J 

49 J 

67i 

88 

53 

58J 
64i 



Average 

25tV 

27A 
32 

34tV 
40 

5if 

65S 
47 

50 T 7 6 
53 i 



Low 

i9i 

21 J 

26 

30 

30i 

36 

43 1 

4i 

42I 

42 

39 



The average price of wheat in the first year 
(1896) was 73 11-16, in the two following 
years very high prices were established, and 
the average may be considered abnormal, as 
the years 1897 and 1898 cover the rise and fall 
of Joseph Leiter. 



WHEAT AND CORN PRICES 



147 



FLUCTUATIONS OF WHEAT PRICES FOR TEN YEARS. 

(The rims of the circles touch the high and low prices of wheat 
each year for 10 years.) 




Reproduced, by permission, from Moody's Magazine of August, 
1906. 



148 THE CYCLES OF SPECULATION 

To digress for a moment, it may be interest- 
ing to note that efforts to carry prices beyond 
reasonable limits almost invariably result in 
disaster to the promoters, no matter how far 
they may be successful in establishing black- 
board quotations. With the exception of "Old 
Hutch" wheat corner in 1888, all the numerous 
attempts to speculate successfully on wholly 
artificial prices in commodities, have failed. 
The Sully cotton campaign, the Leiter wheat 
deal, the Phillips corn deal, the Coster-Martin 
corn deal, all ended in ruin for their sponsors. 

Frpm 1899 to 1901 inclusive, the average 
price of wheat was a little above 70 cents, in 
1902 and 1903 it rose to 80 cents, and in 1904 
and 1905 to $1.00. 

In the latter years, allowance must again be 
made for unusual influences, the Russo-Japan- 
ese war naturally helping wheat prices; mak- 
ing due allowance for this, it may be fairly con- 
sidered that wheat has in the last ten years in- 
creased its average selling price from about 70 
cents to 90 cents, or approximately 30%, 

Why Corn Has Risen More Than Wheat. 

Corn prices in the same period have ad- 
vanced 100%; the comparatively large number 
of uses to which corn is put may partly ac- 
count for the disproportionate enhancement of 



WHEAT AND CORN PRICES 149 



FLUCTUATIONS OF CORN PRICES FOR TEN YEARS. 

(The rims of the circles touch the high and low prices of corn 
each year for 10 years.) 




Reproduced, by permission, from Moody's Magazine of May, 
1906. 



150 THE CYCLES OF SPECULATION 

its price, but the discrepancy is too great to be 
entirely explained away on this account. It 
is necessary to seek some additional and more 
powerful reason. 

The following statistical facts will make it 
clear that corn and wheat are in wholly differ- 
ent positions. 

The United States raised, in 1905, 693,000,- 
000 bushels of wheat. The world's wheat crop 
in the same year was 3,275,200,000 bushels. 
Therefore, we raised approximately 21% of 
the world's wheat crop. The year 1905 is 
fairly indicative of the proportions for the last 
ten years. 

The acreage of wheat in the United States 
in 1896 was 43,618,646; irr 1905 it was 47,854,- 
079, an increase of 38%. 

The world's wheat acreage as indicated by 
production, is increasing at about the same 
rate as is the acreage of the United States. 

The United States raised, in 1905, 2,708,- 
000,000 bushels of corn. The world's corn 
crop was 3,396,800,000; therefore, we raised 
80% of the world's corn. 

The corn acreage cf the United States in 
1896 was 81,027,156; in 1905 it was 94,011,369, 
an increase of 16%. The world's corn acreage, 
as shown by production, did not keep pace 
with our own ratio of increase, but remained 
almost stationary. 



CORN AND WHEAT 151 

These figures show that the world is depend- 
ing on the United States for only 21% of its 
wheat, and that wheat acreage the world over 
has increased about 38% in ten years; but the 
world is depending on the United States for 
80% of its corn, and the world's corn acreage 
has increased less than 16%. 

In order to grasp the full significance of 
these figures, our practical monopoly of corn 
production must be appreciated. Even if we 
admit an equal ratio of increase in corn acreage 
the world over, it remains for the United States 
to provide 80% of the increase. 

Corn Area Limited. 



The probability of any considerable area of 
new corn land being exploited, either at home 
or abroad, is very small. A recent circular 
letter by a man prominent in the cash corn 
trade, states that there is not an uncultivated 
acre of available corn land in the United States. 
This is a radical statement, and does not allow 
for the fact that with a sufficient price stimu- 
lus, considerable wheat, or even cotton land, 
would be diverted to corn. But whatever al- 
lowances are made for an increased corn pro- 
duction, it must be admitted that the possibili- 
ties are largely confined to the United States. 

Wheat acreage is not thus circumscribed; in 



152 THE CYCLES OF SPECULATION 

fact, the case is practically reversed; almost 
80% of the natural increase in wheat produc- 
tion will come from outside our boundaries. 
Of the principal wheat producing countries, — 
France, Germany, Russia, Poland and Cau- 
casus, Italy, Hungary, Spain, Roumania and 
Argentine Republic — the two first named alone 
fail to keep pace with the United States in 
ratio of increased production, and others have 
made up the deficit of these two laggards. 

In a nutshell, the difference between the rela- 
tive positions of wheat and corn is this: The 
world's supply of wheat will be furnished by 
the world, while the world's supply of com 
must be furnished by the United States. 

It appears, therefore, that while wheat and 
corn may both be expected to gradually seek 
a higher average price in sympathy with the 
general upward trend, corn is affected by a 
specific influence, the effects of which must be 
added to the homogeneous advance. 

It is not possible that the supply of corn 
should increase as rapidly as the demand, 
under the circumscribed conditions herein set 
forth. As has already been suggested, the 
price of corn may become attractive enough to 
cause the diversion of wheat and cotton lands 
to corn growing. The possibilities of such a 
course, however, are not only limited by na- 
ture, but such action would stop itself at a 



CORN AREA LIMITED 153 

certain point by decreasing the supply of wheat 
or cotton, and again restoring them to favor 
with the planter. 

The speculator may, therefore, reasonably 
believe that corn is destined, eventually, to 
reach much higher prices. He must, of course, 
allow for the temporary influences of large 
and small crops, and the numerous other actual 
and technical conditions which cause inter- 
mediate fluctuations, and must furthermore 
bear steadily in mind the fact that there is a 
limit beyond which the price of corn can never 
be sustained. 

When a given commodity goes beyond a 
price where it can be replaced by another com- 
modity, it has gone too far; and when necessi- 
ties become luxuries, they take their places as 
such, and demand slackens. 



154 THE CYCLES OF SPECULATION 



FLUCTUATIONS OF COTTON PRICES FOR TEN YEARS. 

(The rims of the circles touch the average high and low price 
of cotton each year for 10 years.) F 



<S) h- en °** ^ — 

j2' oo coco oo <n o> 


5 O <S o o 

05 O) O) O) clj 






<L> 




o 








1$ 4 "1" 




/7> +--r : ^~"3 




V 7 '-, p.- 

/*7 *-** 


-^ 


' r- *' 


^ 


//S;i • 


± ^ ± :: 




\ 


/6" / 


-• - - \ 


/ 


\ 


/S'/r- + -/ 


\ - " 


7 ^/; II JZ. 


"'it S - 


/-r ^ 


-\\ """' " \- 


7 


t- X 


/4'/ -j 


it j 


'*''■ 3 


L 


/Z/ -/- 


t- 


/? f 


_ _ 1 


/V/ „--"" 






- ^^ A- 


/J ' S 




X- / . 




Ill- t V 


-y 4- 


/>(;/; IE Z! 


*'- S"^ t 


/^ -i- A^it 


* V % t 


'^ \_ r 


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- ifc \ K X t ~. 


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r *~\. ~*±, ^ 


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H -= Z^ ^ 1 


n tv i 


a^- 71^ : \ " 


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,U/ < Z^X it ^*<- 


. V4 .i^v^ 7 - : 


m 4^£i T -A 


v t y ^t - 


/6) ^" % fe 2 


^ ^^ t- -T **\ 4 


Q'/7 ^3 £ ^l*- 2 ^. 


_v ^^S 2^^ > / 


y v A V ^ 7 %- - 


^4 ^ Y 


9 tJl J\-J- 3 "^: 


: S s =:r_!^ -^l 


~ j ^? JI - it- ■ 


iL / 




^ : 


^"-"-=v t 3rK it . 


-7 ^^ j- 


8 iC N ^ > ^3t 


-U -<* t 


. t J t ^ SIL'K 


t£~- -4 


7& t 4L LI \ ^23^ 


X- z . : 


' t %^r^ v s ^ vJ'C 


/ 


7 \ -4 ^%V — ^ > 




( , 4^ ^ V -I ++* 


'^^ S : 


S'k -jfcp -it: 3 


- ^=-^ ^- x - 


D ^ L Z F IS 




6 ± i J /\ 




,/ ^4 i£ t 




sj£ rr ' 




^ 4- 




5 ^— ^ 






: ~~E3 


4% 


itlt-t 4 




J LU J 



Reproduced, by permission, from Moody's Magazine of June, 
1906. 



Cycles of Cotton Speculation.* 

The accompanying chart, formed on the 
same plan as the diagram illustrating the 
movements of stocks in Moody's Magazine 
for May, develops some interesting features in 
the movements of Cotton for the last ten years. 

For the benefit of those readers who did not 
follow the stock chart, it may be said that each 
circle represents the fluctuations for a single 
year. The bottom rim of the circle rests on the 
lowest price during the period, and the top 
rim on the highest price. The average price 
is, of course, established at the axis. 

The chart illustrates speculative extremes in 
cotton, the figures on which it is based are not 
the prices of Spot cotton, but extreme high or 
low prices for all options. The result, how- 
ever, would have been only slightly changed 
had Spot cotton prices been employed. 

The diagram is based on fluctuations of 25 
points, or % cent P er pound ; the prices shown, 
therefore, are not exact, but they serve to illus- 
trate comparative movements with sufficient 
accuracy. The high and low figures are not 



* Reprinted from Moody's Magazine of June, 1906. 

155 



156 THE CYCLES OF SPECULATION 

those of a calendar year, but of a fiscal, or crop 
year, ending August 31 of the years named; 
thus the prices for 1896 represent the fluctu- 
ations of the season 1896-1897. As production 
is necessarily a vital factor in making prices, 
this method was adopted to prevent confusion 
in examining the price effects of lean or abund- 
ant production. The range of prices for the 
period considered (1896 to 1906 inclusive), was 
as follows: 

Fluctu- 

Season High Average Low ation 

1896-97 8.50 7.59 6.69 1.81 

1897-98 7.50 6.50 5.62 1.88 

1898-99 6.73 5.84 4.96 1.77 

1899-00 10.00 8.38 6.76 3.24 

1900-01 10.60 8.80 7.01 3.59 

1901-02 9.67 8.51 7.35 2.32 

1902-03 13.75 10.81 7.87 5.88 

1903-04 17.46 13.23 9.01 8.45 

1904-05 11. 15 8.77 6.39 4.76 

1905-06 12.54 10.93 9.32 3.22 

1906-07 11.30 9.95 8.60 2.70 

In the first three years considered we find 
low prices, and naturally restricted specula- 
tion. The speculative price range for the en- 
tire three year period is only a shade more 
than 3% cents per pound. This was occasioned 
by two things; first, the general depression 
following the panic of 1893, and second, over- 
production. An examination of the prices of 
staples shows that unusually low figures pre- 
vailed in 1898 and 1899. Corn, for example, 



COTTON SPECULATION 157 

averaged 27 cents in 1897, and 3iy 2 cents in 
1898. Wheat shows high average prices, but 
the showing is a result of fictitious speculative 
figures established by the Leiter deal, and can- 
not be considered a fair criterion. It may be 
added, however, that wheat sold as low as 64 
cents in 1897, and 62 cents in 1898. 

The question of over-production will be 
made apparent by reference to the following 
table : 

Season Crops in Bales 

1896-97 8.714^00 

1897-98 11,180,000 

1898-99 11,235,000 

1899-00 9,439> 000 

1900-01 10,425,000 

1901-02 10,701,000 

1902-03 10,758,000 

1903-04 10,123,000 

1904-05 13,556,000 

1905-06 10,697,000 

1906-07 13,000,000 

Prior to 1897 no crop of over 10,000,000 bales 
had ever been made; the two bumper crops, 
1897-98 and 1898-99 coming together, naturally 
brought about very low prices, particularly as 
they occurred in a period of general depression. 

In the season next following, 1899-1900, 
there is a marked falling off in production, 
which is again reflected in a higher average 
price. But from that time on, we do not find 
prices and production in such perfect accord. 

It is generally considered now that 10,500,- 



158 THE CYCLES OF SPECULATION 

000 bales is a fair crop. In the four seasons 
from 1900-01 to 1903-04 inclusive, we raised 
normal crops, while prices advanced. It would 
be manifestly unfair to consider the year 1903- 
04 as reflecting with any degree of accuracy 
the normal price of cotton, for in that period 
occurred the disastrous Sully campaign. 
Making due allowance for this, however, it 
may be assumed that prices would have ad- 
vanced if no such deal had occurred. This 
statement is supported by the fact that the 
bursting of the bubble did not put prices below 
9 cents at any time. 

Now the most important part of the period 
is reached, the seasons of 1904-05 and 1905-06. 

In 1904-05, in the face of an unprecedented 
crop of 13,600,000 bales, and in spite of the de- 
pressing influence of a speculative debauch in 
the previous year, the average price of cotton 
was 83^ cents. 

Still later, in 1905-06, a crop only a little be- 
low normal was raised and sold at an average 
price of 10.93. 

Eliminating speculative extremes, and the 
temporary effects of large or small crops, it 
appears that the price of cotton is steadily ad- 
vancing. This is the principal fact for the 
speculator to consider. 

No one pretends to dispute the fact that the 
prices of all staple-food stuffs, metals and other 



COTTON SPECULATION 159 

commodities, as well as labor, have advanced 
materially in the last ten years. Yet the ordin- 
ary speculator ignores this broad general 
principle, and seeks specific causes for the re- 
adjustment in cotton prices. And even this 
research is seldom conducted intelligently. 
The investigator attempts to explain higher 
cotton prices by pointing to reduction of acre- 
age, diversification of crops and organizations 
formed for the purpose of withholding supplies 
from the market. He disregards the fact that 
while these influences play some small part in 
the matter, cotton is also seeking a higher level 
in common with every commodity that is 
bought and sold. 

The contention is frequently heard that 
10,500,000 bales, or even 11,000,000 bales of 
cotton can no longer be considered an average 
crop; that the supply should steadily increase 
in order to keep pace with consumptive de- 
mand, and that the crop of 1904-05 was there- 
fore small, and the crop of 1903-04 not so large 
as it would appear. As this is the most com- 
mon of the numerous explanations offered as 
to the recent high prices of cotton, it will be 
briefly discussed. 

In order to arrive at a clear view of the ratio 
of increase in production, a considerable period 
must be consulted. The statistics of crops 
from year to year, or even from two or three 



160 THE CYCLES OF SPECULATION 

years, will not do. Let us cover a long period, 
jumping ten years at a time. 

Season Crops in Bales 
1866-61 3,849,469 

1870-71 4,352,317 

1880-81 6,605,750 

1890-91 8,652,597 

1900-01 10,383,432 

This exhibit shows that if a sufficiently long 
period is consulted, a steady increase in pro- 
duction is shown; the average production is 
also well maintained in the five years from 
1901-02 to 1905-06, if the bumper crop of 1904- 
05 is distributed over the entire period. 

The contention is all right, but its formu- 
lators do not take the pains to ascertain that 
what they claim should occur, is exactly what 
has occurred. 

The gist of the whole matter is this : regard- 
less of all temporary or artificial influences, 
some powerful force, not related to supply and 
demand, is shouldering prices steadily upward. 

To the speculator this fact recognized, 
analyzed, and properly applied should be of 
incalculable benefit. If he understands why 
prices have been advancing, he will be able to 
determine with facility how long the influence 
will probably endure. Intead of being misled, 
or rendered over-cautious by obsolete records 
of the past, he will be able to calculate from 
these obsolete records the reasonable expec- 



COTTON SPECULATION 161 

tations of the future. Temporary changes will, 
of course, be brought about by temporary 
causes. Fundamental values will still be in- 
fluenced by supply and demand, but if an in- 
dependent and submerged force is also at work, 
due allowance must be made for its operation. 

That such a force is at work is written large 
between the lines of compiled statistics; to 
ignore its existence is an error rank with mis- 
chief. The speculator who does not consult 
this influence may easily make the mistake of 
selling at low prices because they are high by 
comparison with prices which obtained a few 
years ago. 

On the other hand, a clear understanding of 
the matter will enable the trader to decide with 
more or less accuracy what now constitutes a 
low price for cotton, and what will be the prob- 
able price for the future. 



Conclusion. 

The questions most frequently asked by in- 
experienced people are as follows : 

1 — What margins are necessary to reason- 
able safety? 

2 — Is it better to study the entire list or 
make a specialty of one stock? 

3 — What class of securities is the safest? 

A — What may be considered a fair rally or 
reaction in stock prices under ordinary circum- 
stances? 

5 — What is the best general method of trad- 
ing? 

Some of these questions have been answered 
in the preceding chapters, but they will be 
taken up here in turn and the writer's views 
submitted on each head. 

1 — What margins are necessary to reason- 
able safety? 

There is no unqualified answer to this ques- 
tion. The price of the shares operated in must 
be considered. All other things being equal, 
a stock selling at $50 would require only half 
the margin employed in operating in a security 

163 



164 THE CYCLES OF SPECULATION 

selling at $100. If the $50 stock declines 25 
points, it has suffered a quoted loss of half its 
value. The $100 stock, however, must decline 
50 points to suffer an equal loss. This per- 
centage of advance or decline is established 
with remarkable fidelity in every considerable 
movement. 

If the scale order is employed as a method 
of accumulating shares, extraordinary marginal 
provisions must be made, for even as the line 
acquired increases, the original margin 
dwindles. The scale order is, or should be, 
based on the assumption that a temporary de- 
cline below the first purchase price is desirable 
and is necessary to the best results. This fact, 
however, should never be contorted in such a 
manner as to instigate purchases at high prices. 
If the operator who employs the scale order 
will try to make the first purchase at what he 
considers a bargain price, or in other words at 
what he calculates to be the very bottom of a 
movement, he will surely find that in nine 
cases out of ten, his own errors or the velocity 
which frequently carries prices to ridiculously 
low or high points will enable him to accumu- 
late his line to advantage. The scale order 
should never be used on its mechanical merits 
alone, but merely as a method of averaging. 

It goes without saying that marginal ne- 
cessities will be principally gauged by the cor- 



CONCLUSION 165 

rectness of the speculator's general views. It 
is the writer's opinion, that if care and intelli- 
gence is used in judging values, conditions, and 
the stages of the market, a margin of 20% will 
be sufficient in almost all cases. That is to 
say, 20 points on a stock selling at par and 10 
points on a stock selling at 50. It must be 
distinctly understood, however, that this 
opinion contemplates purchases at low prices 
after a decline has occurred; and when both 
the technical and general conditions warrant 
purchases. 

The late Charles H. Dow fixed the sum of 
$2,500 as the minimum amount necessary to 
safe operating in ten share lots, but this sum, 
or any other for that matter, is an arbitrary 
estimate. Mr. Dow's figure was founded on 
the necessity of averaging and also upon a 
most laudable caution and conservatism which, 
however, might at times result in unnecessary 
restriction of operations at a most favorable 
period. There are times when $500 might be 
safely made the basis of trading in certain 
stocks; there are other times and other stocks 
where $2,500 would be wholly insufficient. 

While no rule of thumb is possible in this 
regard, it is the writer's opinion that there is 
no necessity for being out in calculations more 
than 20%, provided always that due care has 
been exercised in basing such calculations. 



166 THE CYCLES OF SPECULATION 

2 — Is it better to study the entire list or 
make a specialty of one security? 

It is better to examine the conditions and 
prices of all the leading securities. This is the 
only method by which comparative values may 
be arrived at. It is frequently the case, par- 
ticularly after a comprehensive decline or a 
panic, that certain excellent shares have suf- 
fered almost as much as the more questionable 
securities. At such times, what we want is not 
only a good bargain but the best bargain ob- 
tainable, and this may be secured more readily 
by a careful comparison of prices, values and 
income return than by any other method. 

Again, in an upward movement stocks gen- 
erally advance, not homogeneously, but one at 
a time or in closely related groups. Certain 
shares may have a reasonable advance while 
others hang fire. If we have good reason to 
believe we are on the eve of a great bull move- 
ment, the best results may be attained by a 
process of rotation in trading. 

3 — What class of securities is the safest? 

Railroad stocks are the soundest securities. 
The danger of competition is not so great; the 
assets are more tangible and when once the 
specific influences which are now working 
against them have been cured or eliminated, 
as they certainly will be in time, these shares 
will show a steady improvement both in value 



CONCLUSION 167 

and price. At times the very best stock will 
suffer severely and much pessimistic talk will 
be heard of receiverships, etc. That is the 
time to buy. Lord Rothschild once advised a 
friend to buy French rentes. "But the streets 
of Paris are running with blood," replied the 
recipient of the advice. "That," responded 
Rothschild, "is the reason you can buy rentes 
so cheaply." The man who purchases the 
shares of railroads when they are greatly de- 
pressed may rest serenely in the consciousness 
that the future of American railroads is assured 
and that measures seeking to obstruct pro- 
gress or prevent fair returns on investments, 
either in the way of income on money or the 
natural accretion of values cannot possibly en- 
dure. 

4 — What may be considered a fair rally or 
reaction in stock prices? 

Here again the question of ruling prices of 
a certain stock are to be considered. Low- 
priced stocks always move in a narrower range 
than do higher priced ones. The extent of a 
probable comparative movement may be 
gauged by percentages with a fair degree of 
accuracy. This method of measuring a com- 
parative advance or decline, however, will be 
frequently disturbed by specific influences 
bearing on a certain stock or group of stocks. 

It is useless to undertake to establish even 



m± 







168 THE CYCLES OF SPECULATION 

a rough rule for ordinary movements by a 
system of averages culled from history. We 
find that in the course of ten years the rallies 
and reactions which appeared were so varied 
in character both as to the extent in points and 
the duration in days, that a barometrical aver- 
age founded on such investigation would be 
empirical. However, the results of this in- 
ductive reasoning will be given for what they 
are worth. 

The principal movements for ten years have 
been as follows: 

1.— The Bull Market of 1897 to 1899. 

This advance began in April, 1897, and ter- 
minated in April, 1899 — two years of advancing 
prices. The average advance in Industrial 
shares was 38.79 points, or about 100%. Rail- 
roads advanced 38.92 points, or about 80%. 

The intermediate reactions were as follows: 

Extent in Extent in 

] 
Date of Reaction 
Sept. iotoNov. 8, '97 
Jan. 7 to Mar. 25, '98 
Jun. 10 to Jun.i6,'98 
Aug. 26 to Oct. I9,'98 
Jan. 30 to Feb. 7, '99 

2.— The Bear Market of 1899-1900. 

This decline began May 1st, 1899, and cul- 
minated Sept. 24, 1900 — 17 months. The aver- 






idustrials 


Rails 


Duratic 


Points 


Points 


Days 


10.17 


9.78 


59 


8.67 


10.43 


78 


2.84 


2.93 


7 


9.41 


4.41 


5 2 


3.07 


3.38 


8 



CONCLUSION 169 

age gross decline in Industrial shares was 
24.32 points, or about 32%, and in Rails, 13.27 
points, or about 18%. 

Intermediate rallies were as follows : 

Extent in Extent in 



Industrials 


Rails 


Duration 


Date of Rally 


Points 


Points 


Days 


May 31 to Sep. 5, '99 


10.10 


8.17 


97 


Dec. 18, '99, to Jan. 








2, 'oo 


9.86 


6.38 


16 


Jan. 11 to Feb. 5^00 


5.09 


4.56 


26 


Mar. 9 to Apr. 6,'oo 


5.04 


5-22 


29 


May 15 to June 1^00 


2.76 


3.42 


17 


June 23 to July 23, '00 


5.34 


4.56 


3i 


July 31 to Aug. 15. . 


2.10 


2.31 


16 



3.— The Bull Market of 1901. 

The advance began Oct. 1, 1900, and cul- 
minated Aug. 26, 1901, 11 months. The aver- 
age advance in Industrial shares was 20.87 
points, or about 39%. The average advance 
in Rails was 37.92 points, or about 51%. 

Intermediate reactions were as follows : 

Extent in Extent in 

Industrials Rails Duration 

Date of Reaction Points Points Days 

Nov. 20 to Dec. 8, 'oo 5.09 1.67 19 



Dec. 27, >oo, to Jan 

19, 'oi 

May 1 to May 9 . . . 
June 17 to July 15. 
July 29 to Aug 6 . . 



6.29 4.39 24 

7.55 14.49 9 

8.80 11.30 29 

3.89 6.64 9 



170 THE CYCLES OF SPECULATION 
4.— The Movement of 1902. 

The year 1902 is particularly interesting, as 
it shows what occurred in the market the year 
prior to a period of industrial relaxation. This 
year cannot be called either a bull or bear year, 
as while railroad stocks advanced and closed 
the year with net gains, the Industrial stocks 
suffered material declines. As the declines in 
Industrial stocks was greater than the advance 
in Rails, we will arbitrarily designate the year 
as a bear period and examine the homogeneous 
movement for rallies, instead of reactions. 

From Dec. 12, 1901, to Dec. 15, 1902, In- 
dustrial shares declined 5.74 points and rails 
advanced 3 points. 

Intermediate rallies were as follows: 



Extent in Extent in 
Industrials Rails 
Date of Rally Points Points 


Duration 
Days 


Feb. 20 to Mar.21,'02 2.84 3.45 
Apr. 10 to Apr. 24. . 2.49 4.91 
May 19 to May 24. . 2.09 3.99 
June 24 to July 28 . . 3.61 7.44 
Aug. 21 to Sept. 19. . 2.44 4.05 
Sept. 29 to Oct. 3 . . . 2.51 4.37 
Oct. 11 to Oct. 17. . . 2.73 4.96 
Nov. 14 to Nov. 21 . . 2.32 4.80 


30 

15 
6 

35 

30 

5 

7 

8 


5.— The Bear Market of 1903 





This decline began Jan. 8, 1903, and culmin- 
ated Nov. 9th, of the year, 10 months. The 
average gross decline in Industrial shares was 



CONCLUSION 



171 



24.18 points, or about 36^2%. The decline in 
Rails was 32.48 points, or about 27%. 
The intermediate rallies were as follows: 

Extent in Extent in 
Industrials Rails Duration 
Date of Rally 
Jan. 20 to Feb. i6,'o3 
Mar. io to Mar. 20. . 
Apr. 13 to Apr. 30. . 
June 10 to June 12. 
Aug. 8 to Aug. 17. . 



Points 

3.5i 

1.85 


Points . 
1.38 
3. 11 


Days 
28 
11 


3-77 
2.60 
6.50 


5.07 
4.48 
8.14 


9 

3 

10 



6.— The Bull Market of 1904 and 1905. 



The advance began Jan. 6, 1904, and cul- 
minated Jan. 22, 1906 — a little over two years. 
The average advance in Industrial shares was 
55.93 points, or about 119%. The average ad- 
vance in Rails was 49.56 points, or about 55%. 

The intermediate reactions were as follows: 



Extent in 


Extent in 




Industrials 


Rails 


Duration 


Date of Reaction Points 


Points 


Days 


Jan. 27 to Feb. 24/04 3.79 


4.17 


29 


Apr. 7 to May 18. . . 2.55 


4.03 


42 


Dec. 5 to Dec. 12. . . 7.46 


5-93 


8 


Apr. 14, '05, to May 






8, '05 9.23 


9.81 


25 


May 12 to May 22. . 6.68 


5.5o 


11 


Aug. 23 to Sept. 7. . 4. 2 % 


4.82 


16 


Nov. 1 to Nov. 13 . . . 3.31 


4.74 


13 



The year 1906 was a neutral year. Prices 
for Industrials declined only slightly during 
the year and average prices of railroad stocks 
were the same in December as in January. 



172 THE CYCLES OF SPECULATION 

Money could have been made throughout the 
period, either by sales on rallies, or purchases 
on declines. As a consideration of a neutral 
year would add little to this exhibit, it will be 
omitted. 

5j — What is the best general method of 
trading? 

The writer's reply to this question consists 
principally of a summing up of points already 
covered in other portions of this work. It is 
necessary to study and understand the subject 
thoroughly, to know values, general conditions, 
the technical position of shares, and above all 
things to consult future probabilities rather 
than past performances. Study of the past has 
its educational value and this is also true of 
the present, but the future is the all-important 
thing. Retrospective speculation is one of the 
commonest and most flagrant of the numerous 
errors made by public participators. Get what- 
ever of experience and information you can 
from history, but speculate on the future. 

The man who enters the market with insuf- 
ficient capital, who expects to get rich quick 
or who allows success to lead him into ex- 
cesses and over-speculation will lose. It is as 
certain as death. He may succeed for a time 
but not for long. 

Operations based on "tips" or "charts" will 
lead to final disaster. This thing of trying to 



CONCLUSION 173 

attribute habits to a market is, in the writer's 
opinion, ridiculous. The movements of prices 
are caused by events. We know that in periods 
of financial stringency or business depression 
prices fall, and in periods of inflation and good 
times prices rise. It is possible to formulate 
a system founded on repetitions applicable to 
every game of chance, and laid out on paper, 
that system will appear infallible. You can 
find the exponents of machine-made riches in 
every pool-room and gambling house in the 
country. They all eventually lose and there 
is nothing to show that the advocates of charts 
as a basis for stock trading ever fared any bet- 
ter. Imagine James R. Keene, or J. P. Morgan 
poring over a chart and operating thereon. 
Even if the market did have habits, as soon as 
these habits were recognized and followed by 
a sufficient number of people, the technical 
position would be rendered so rotten that the 
charts would fail from that influence alone. 
Charts, employed as a convenient method of 
picturing the past, may have a certain value, 
but used as a basis for trading they are an evi- 
dence of laziness or incapacity, or both. It re- 
quires hard work to be successful in any line. 
Thinking is hard work, study is hard work, 
research is hard work; and it is infinitely 
easier to bet on repetitions all nicely laid out 
in crooked lines on a sheet of paper than to 



174 THE CYCLES OF SPECULATION 

laboriously erect sound deductions; but the 
difference in the two methods is that one will 
succeed and the other will fail. 

We may also resort to the ultimatum em- 
ployed by those eminent citizens who punch 
each other's noses in a prize-ring, i.e., tell the 
chart-players to "go and get a reputation." 
When they can show even one instance of a 
fortune accumulated by this method their 
cause will be greatly strengthened. 

In the exception taken to Mr. Dow's theory 
of $2,500 being the minimum amount neces- 
sary for operations in small lots, nothing could 
be further from the present writer's intentions 
than to recommend transactions on insufficient 
margin. What is sought is merely the truth. 
The contention that it is wise to stimulate ex- 
treme conservatism will not hold. If the 
naming of a certain sum far in excess of real 
needs is praiseworthy, we may expand the mat- 
ter indefinitely and name $5,000 or even $10,- 
000, as the limit. 

But on the other hand, errors on the side of 
prudence are vastly preferable to errors on the 
side of rashness. In this as in all other things, 
the golden mean is the really desirable factor. 

As to the best side of the market for oper- 
ations, it is thought that the long side offers 
the greatest opportunities. The long side is 
healthier, it is constructive, and almost all the 



CONCLUSION 175 

great fortunes made in the market have been 
founded on discreet and well-timed purchases. 
To adhere to this plan, however, frequently re- 
quires long periods of non-participation, and 
speculators are not, as a class, very patient. 
The man who can so school himself as to await 
opportunities to purchase good securities at 
low prices has by far the best of the bargain. 
Few men can do it. 

It is fully realized that a work which defends 
stock speculation in any degree, will meet with 
much criticism. Nevertheless, people will 
speculate and if you are one of those who will 
— do it right. 

It is submitted in concluding this work that 
if the advice here given is heeded, i. e., to know 
what you are buying and why; to buy only 
good properties when prices are depressed ; to 
exercise patience and provide sufficient capi- 
tal ; to eliminate first and forever the idea that 
correct deductions mean sudden riches; to use 
brains instead of charts, and common-sense in- 
stead of tips; in short, to apply to speculative 
ventures the same degree of business fore- 
sight and understanding as would be employed 
in any other business, the evils and losses 
which have always been a part of speculative 
history, would be diminished if not eliminated. 



INDEX 



Accidents: Page 

effect of on stock prices 84 

Averages: Barometer of 110 

Bank Statement 59, 125 

British investment bonds: Prices of 45 

Business Depression: Effects of on rails and 

industrials 105 

"Calls," explained 89 

Charts: "Composite Common" 137 

corn prices 149 

cotton prices 154 

wheat prices 147 

"Composite common": range of 133 

Corn: Area limited 151 

chart 149 

prices 146 

risen more than wheat 148 

Cotton: Chart 154 

crops in bales 157 

cycles of speculation in 155 

prices 156 

Credits: Expansion of ignored 75 

Crises : Indications of 112 

principal in last century 24 

Crops and Crop Failures: 

damage issue not to be ignored 123 

importance of 82 

Dividends: adverse effect on the short seller 101 

Dow, Charles H.: 

rule as to margins necessary 165 



INDEX 

Page 

Fixed Charges: As factor of safety 114 

important to investor 116 

percentage of in various railroads 115 

Gambling transactions: Percentage against the 

speculator 9 

Gold production: 

effect in speculative commodities 53 

effect on common stocks of railroads 49 

effect on securities having a fixed rate of 

income 43 

effect on stocks of industrials 52 

influence of on prices 39 

Grain: Cycles of speculation in 145 

Legislation: As a market factor 77 

Manipulation: By creation of false appearances 22 

Margins: Necessary to reasonable safety 163 

required by scale order operations 164 

use and abuse of 12 

Market Movements: 

principal for ten years 168 

Money conditions: 

as a factor of speculation 59 

Periodicity: 

unreliable as basis of speculation 35, 69 

Pig Iron: Production in U. S 29 

Prices: 

"Composite" stock 136 

corn 146 

cotton 156 

ordinary swing of in speculative cycle 113 

wheat 146 

Presidential contest: Influence on prices 81 

Privileges fi 9 

"Puts," explained 90 

Railroad: Basic values of 104 



INDEX 

Page 

Rights: How to compute value of 109 

Securities: Entire list should be studied 166 

railroad stocks the soundest 166 

selection of 124 

undigested 108 

Speculation : Cycles of 21 

possibilities of 14 

preliminary hard work needed 17 

Stocks: Borrowing and lending 117 

Cycles of Speculation in 133 

"Straddles," explained 92 

Tariff agitation: effect on speculation 81 

"Tips": Operations based on them disastrous. .. 172 

Trading: Best method of Ill, 172 

hypothetical 15 

scalping 120 

Wheat: Chart 147 

prices 146 



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We Pitfalls §f Speculation 

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